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There are two stocks in the market, Stock A and Stock B. The price of Stock A today is $76. The price of Stock A next year will be $65 if the economy is in a recession, $88 if the economy is normal, and $98 if the economy is expanding. The probabilities of recession, normal times, and expansion are .21, .59, and .20, respectively. Stock A pays no dividends and has a correlation of .71 with the market portfolio. Stock B has an expected return of 14.1 percent, a standard deviation of 34.1 percent, a correlation with the market portfolio of .25, and a correlation with Stock A of .37. The market portfolio has a standard deviation of 18.1 percent. Assume the CAPM holds. a-1.What is the return for each state of the economy for Stock A? (A negative answer should be indicated by a minus sign. Do not round intermediate calculations and enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.) a- What is the expected return of Stock A? (Do not round intermediate calculations 2. and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) a- What is the variance of Stock A? (Do not round intermediate calculations and round 3. your answer to 4 decimal places, e.g., .1616.) a- What is the standard deviation of Stock A? (Do not round intermediate calculations 4. and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) a- What is the beta of Stock A? (Do not round intermediate calculations and round 5. your answer to 3 decimal places, e.g., 32.161.) a- What is the beta of Stock B? (Do not round intermediate calculations and round 6. your answer to 3 decimal places, e.g., 32.161.)

There are two stocks in the market, Stock A and Stock B. The price of Stock A today is $76. The price of Stock A next year will be $65 if the economy is in a recession, $88 if the economy is normal, and $98 if the economy is expanding. The probabilities of recession, normal times, and expansion are .21, .59, and .20, respectively. Stock A pays no dividends and has a correlation of .71 with the market portfolio. Stock B has an expected return of 14.1 percent, a standard deviation of 34.1 percent, a correlation with the market portfolio of .25, and a correlation with Stock A of .37. The market portfolio has a standard deviation of 18.1 percent. Assume the CAPM holds. a-1.What is the return for each state of the economy for Stock A? (A negative answer should be indicated by a minus sign. Do not round intermediate calculations and enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.) a- What is the expected return of Stock A? (Do not round intermediate calculations 2. and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) a- What is the variance of Stock A? (Do not round intermediate calculations and round 3. your answer to 4 decimal places, e.g., .1616.) a- What is the standard deviation of Stock A? (Do not round intermediate calculations 4. and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) a- What is the beta of Stock A? (Do not round intermediate calculations and round 5. your answer to 3 decimal places, e.g., 32.161.) a- What is the beta of Stock B? (Do not round intermediate calculations and round 6. your answer to 3 decimal places, e.g., 32.161.)

EBK CONTEMPORARY FINANCIAL MANAGEMENT
EBK CONTEMPORARY FINANCIAL MANAGEMENT
14th Edition
ISBN:9781337514835
Author:MOYER
Publisher:MOYER
Chapter8: Analysis Of Risk And Return
Section: Chapter Questions
Problem 15P
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There are two stocks in the market, Stock A and Stock B. The price of Stock A today is $76. The price of Stock A next year will be $65 if the economy is in a recession, $88 if the economy is normal, and $98 if the economy is expanding. The probabilities of recession, normal times, and expansion are .21, .59, and .20, respectively. Stock A pays no dividends and has a correlation of .71 with the market portfolio. Stock B has an expected return of 14.1 percent, a standard deviation of 34.1 percent, a correlation with the market portfolio of .25, and a correlation with Stock A of .37. The market portfolio has a standard deviation of 18.1 percent. Assume the CAPM holds. a-1.What is the return for each state of the economy for Stock A? (A negative answer should be indicated by a minus sign. Do not round intermediate calculations and enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.) a- What is the expected return of Stock A? (Do not round intermediate calculations 2. and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) a- What is the variance of Stock A? (Do not round intermediate calculations and round 3. your answer to 4 decimal places, e.g., .1616.) a- What is the standard deviation of Stock A? (Do not round intermediate calculations 4. and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) a- What is the beta of Stock A? (Do not round intermediate calculations and round 5. your answer to 3 decimal places, e.g., 32.161.) a- What is the beta of Stock B? (Do not round intermediate calculations and round 6. your answer to 3 decimal places, e.g., 32.161.) a-1. Recession a-1. Normal -14.47 % 15.79% a-1. Expansion a-2. Expected return a-3. Variance a-4. Standard deviation a-5. Beta of Stock A 28.95% % 0.0105 10.23% 0.400
Transcribed Image Text:There are two stocks in the market, Stock A and Stock B. The price of Stock A today is $76. The price of Stock A next year will be $65 if the economy is in a recession, $88 if the economy is normal, and $98 if the economy is expanding. The probabilities of recession, normal times, and expansion are .21, .59, and .20, respectively. Stock A pays no dividends and has a correlation of .71 with the market portfolio. Stock B has an expected return of 14.1 percent, a standard deviation of 34.1 percent, a correlation with the market portfolio of .25, and a correlation with Stock A of .37. The market portfolio has a standard deviation of 18.1 percent. Assume the CAPM holds. a-1.What is the return for each state of the economy for Stock A? (A negative answer should be indicated by a minus sign. Do not round intermediate calculations and enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.) a- What is the expected return of Stock A? (Do not round intermediate calculations 2. and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) a- What is the variance of Stock A? (Do not round intermediate calculations and round 3. your answer to 4 decimal places, e.g., .1616.) a- What is the standard deviation of Stock A? (Do not round intermediate calculations 4. and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) a- What is the beta of Stock A? (Do not round intermediate calculations and round 5. your answer to 3 decimal places, e.g., 32.161.) a- What is the beta of Stock B? (Do not round intermediate calculations and round 6. your answer to 3 decimal places, e.g., 32.161.) a-1. Recession a-1. Normal -14.47 % 15.79% a-1. Expansion a-2. Expected return a-3. Variance a-4. Standard deviation a-5. Beta of Stock A 28.95% % 0.0105 10.23% 0.400
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