Consider the following information about three stocks: Rate of Return If State Occurs Probability of State of Economy TITI State of Economy Stock A Stock B Stock C Вoom .25 .13 .29 .60 Normal .60 .08 .11 .13 Bust .15 .02 -18 -45 a-1.lf your portfolio is invested 40 percent each in A and B and 20 percent in C, what is the portfolio expected return? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) a- What is the variance? (Do not round intermediate calculations and round 2. your answer to 5 decimal places, e.g., .16161.)
Consider the following information about three stocks: Rate of Return If State Occurs Probability of State of Economy TITI State of Economy Stock A Stock B Stock C Вoom .25 .13 .29 .60 Normal .60 .08 .11 .13 Bust .15 .02 -18 -45 a-1.lf your portfolio is invested 40 percent each in A and B and 20 percent in C, what is the portfolio expected return? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) a- What is the variance? (Do not round intermediate calculations and round 2. your answer to 5 decimal places, e.g., .16161.)
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
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Risk and return
Before understanding the concept of Risk and Return in Financial Management, understanding the two-concept Risk and return individually is necessary.
Capital Asset Pricing Model
Capital asset pricing model, also known as CAPM, shows the relationship between the expected return of the investment and the market at risk. This concept is basically used particularly in the case of stocks or shares. It is also used across finance for pricing assets that have higher risk identity and for evaluating the expected returns for the assets given the risk of those assets and also the cost of capital.
Question
Transcribed Image Text:Consider the following information about three stocks:
Rate of Return If State Occurs
Probability of State
of Economy
.25
State of Economy
Stock A
Stock B
Stock C
Вoom
.13
.29
.60
Normal
.60
.08
.11
.13
Bust
.15
.02
-18
-45
a-1.lf your portfolio is invested 40 percent each in A and B and 20 percent in C, what is
the portfolio expected return? (Do not round intermediate calculations and enter
your answer as a percent rounded to 2 decimal places, e.g., 32.16.)
a- What is the variance? (Do not round intermediate calculations and round
2. your answer to 5 decimal places, e.g., .16161.)
a- What is the standard deviation? (Do not round intermediate calculations and enter
3. your answer as a percent rounded to 2 decimal places, e.g., 32.16.)
b. If the expected T-bill rate is 3.70 percent, what is the expected risk premium on the
portfolio? (Do not round intermediate calculations and enter your answer as a
percent rounded to 2 decimal places, e.g., 32.16.)
c-1. If the expected inflation rate is 3.30 percent, what are the approximate and exact
expected real returns on the portfolio? (Do not round intermediate calculations and
enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.)
c- What are the approximate and exact expected real risk premiums on the portfolio?
2. (Do not round intermediate calculations and enter your answers as a percent
rounded to 2 decimal places, e.g., 32.16.)
a-1. Portfolio expected return
%
a-2. Variance
a-3. Standard deviation
%
b. Expected risk premium
c-1. Approximate expected real return
%
c-1. Exact expected real return
c-2. Approximate expected real risk premium
%
c-2. Exact expected real risk premium
%
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