Consider the following information about the various states of economy and the returns of various investment alternatives for each scenario. Answer the questions that follow. State of the Economy Recession Probability 0.2 % Return on T-Bills, Stocks and Market Index Pay-Rubber- made 10 T- Bills 7 Phillips -22 up 28 Market Index -13
Consider the following information about the various states of economy and the returns of various investment alternatives for each scenario. Answer the questions that follow. State of the Economy Recession Probability 0.2 % Return on T-Bills, Stocks and Market Index Pay-Rubber- made 10 T- Bills 7 Phillips -22 up 28 Market Index -13
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
Related questions
Question
Question 3
From the information generated in the previous two questions;
a) Identify two investment alternatives that can be combined in a portfolio. Assume a 50-
50 investment allocation in each investment alternative
b) Compute the expected return of the portfolio thus formed
c) Compute the portfolio’s beta. Is the portfolio aggressive or defensive?
Transcribed Image Text:Consider the following information about the various states of economy and the returns of
various investment alternatives for each scenario. Answer the questions that follow.
State of the Economy
Recession
Below Average
Average
Above Average
Boom
Standard Deviation
Coefficient of Variation
Covariance with MP
Correlation with Market Index
Beta
CAPM Req. Return
Valuation
(Overvalued/Undervalued/Fairly
Valued)
Nature of stock
(Aggressive/Defensive)
Probability
0.2
0.1
0.3
0.3
0.1
% Return on T-Bills, Stocks and Market
Index
T-
Bills
7
7
7
7
7
Phillips
-22
-2
20
35
50
Pay- Rubber-
made
10
-10
7
45
30
up
28
14.7
0
-10
-20
Market
Index
-13
1
15
29
43
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