1)Compute the expected return of an asset given these three economic states, the

Question

1)Compute the expected return of an asset given these three economic states, their likelihoods, and the potential returns:

Economic State          Probability         Return  

Fast Growth               20.00%             30.00%

Slow Growth              50.00%               6.00%

Recession                  30.00%              -2.00%

2

Compute the standard deviation of an asset given these three economic states, their likelihoods, and the potential returns:

Economic           State Probability     Return

Fast Growth      20.00%                  30.00%

Slow Growth     50.00%                    6.00%

Recession         30.00%                   -2.00%

3) Year-to-date, Company O had earned -2.10% return. During the same time period Company V earned 8.00% and Company M earned 6.25%. If you have a portfolio made up of 40.00% Company O, 30.00% Company V, and 30.00% Company M, what is the overall portfolio return?

4What is the Price/Value of a 7-year, $1,000 par bond with a 6% coupon. The market interest rate is 11%.

5)Mary has the opportunity to buy the following cash flows per year beginning next year: 1) $1,000; 2) $1,000; 3) $1,000; 4) $1,000; 5) $1,000; 6) $1,000;7) $1,000; 8) $1,000; 9) $1,000; 10) $1,000.  If she can invest any funds to earn 4.35%, what is the most she should pay for this cash flow stream?

Explanation / Answer

1)

Economic State          Probability         Return  

Fast Growth               20.00%             30.00%

Slow Growth              50.00%               6.00%

Recession                  30.00%              -2.00%

Expected return = 0.2 * 30% + 0.5 * 6% + 0.3 * - 2% = 6% + 3% - 0.6% = 8.4%

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