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- Suppose that the market can be described by the following three sources of systematic risk with associated risk premiums. Factor Risk Premium Industrial production (I) 8 % Interest rates (R) 4 % Consumer confidence (C) 6 % The return on a particular stock is generated according to the following equation: r = 16% + 1.6I + 0.8R + 1.30C + e a-1. Find the equilibrium rate of return on this stock using the APT. The T-bill rate is 4%. (Do not round intermediate calculations. Round your answer to 1 decimal place.) a-2. Is the stock over- or underpriced?Q2) Consider the following information given below and do the following; a) Estimate monthly expected returns and the associated risk (Standard devistion) for each of the company A,B C securities b) Rank securities of company A, B, and C from the most preferred to the least preferred, assuming that the rational investor behavior holds. Year Return of Company A Return of Company B Return of Company C 1 4.20% 4.08% 1.07% -2.71% -2.73% -5.44% 4.15% 18.12% 0.74% 4 3.68% 1.60% -10.78% 2.Suppose that the market can be described by the following three sources of systematic risk with associated risk premiums. Factor Risk Premium Industrial production (I) 6 % Interest rates (R) 2 Consumer confidence (C) 4 The return on a particular stock is generated according to the following equation: r = 15% + 1.0I + 0.5R + 0.75C + ea-1. Find the equilibrium rate of return on this stock using the APT. The T-bill rate is 6%. (Do not round intermediate calculations. Round your answer to 1 decimal place.)
- Assume that the financial markets are in equilibrium. Information on three particular shares is provided in the table below. Find the risk free rate and the expected return on the market portfolio. Asset A B C A. 6%, 18% B. 6%, 14% C. 5%, 18% D. 7%, 16% E. 5%, 14% Expected Return 7.6% 12.4% 15.6% Beta 0.2 0.8 1.2Suppose securities A, B, and C have the following expected return and risk. Stock Expected return Risk A 8% 6% B 7% 9% C 13% 9% What is the coefficient of variation for stock A?A stock’s return has the following distribution: Demand for the company’s products Probability of this demand occurring Rate of Return if this demand occurs Weak 0.1 (0.5) Below Average 0.2 (0.05) Average 0.4 0.16 Above Average 0.2 0.25 Strong 0.1 0.60 Use statistical measures to calculate the risk and return of the stock.
- A3) Finance What is the expected standard deviation of stock A's returns based on the information presented in the table? Outcome Probability of outcome Stock A return in outcome : Good 16% 65.00% Medium 51% 17.00% Bad "?" -35.00%Exercises: a. The standard deviation of returns is 0.30 for Stock A and 0.20 for Stock B. The covariance between the returns of A and B is 0.006. The correlation of returns between A and B is: b. Explain the differences between systemic risk and unsystematic risk, give additional examples c. Compare and contrast the Capital Market Line and Security Market Line d. The covariance of the market's returns with the stock's returns is 0.008. The standard deviation of the market's returns is 0.08, and the standard deviation of the stock's returns is 0. 11. What is the correlation coefficient of the returns of the stock and the returns of the market? e. According to the CAPM, what is the required rate of return for a stock with a beta of 0.7, when the risk-free rate is 7% and the expected market rate of return is 14%Consider information given in the table below and answers the question asked thereafter: State Probability return on stock A Return on stock B A 0.15 10% 9% B 0.15 6% 15% C 0.10 20% 10% D 0.18 5% -8% E 0.12 -10% 20% F 0.30 8% 5% i. Calculate expected return on each stock? On the basis of this measure, which stockyou will choose?ii. Calculate standard deviation of the returns on each stock? On the basis of thismeasure, which stock you will choose?iii. Calculate coefficient of variance of the returns on each stock? On the basis of thismeasure, which stock you will choose?
- Consider information given in the table below and answers the question asked thereafter: State Probability return on stock A Return on stock B A 0.15 10% 9% B 0.15 6% 15% C 0.10 20% 10% D 0.18 5% -8% E 0.12 -10% 20% F 0.30 8% 5% Calculate covariance and coefficient of correlation between the returns of thestocks A and B.v. Now suppose you have $100,000 to invest and you want to a hold a portfoliocomprising of $45,000 invested in stock A and remaining amount in stock B.Calculate risk and return of your portfolio.3. The following information is given with respect to stock A: Scenario Probability Market return 1 0.1 -0.18 2 0.3 0.07 3 0.4 0.16 4 0.2 0.21 Knowing that the Rfis 0.07 compute alpha and the information ratio. Portfolio P return -0.32 0.00 0.22 0.40Estimate the return and standard deviation of the historical returns on Stock A that were: 15%, 20%, 22%, 18% and 25%.Explain any two measures of risk using numerical examples.?