Financial analysts have estimated the returns on shares of the Goldday Corporation and the overall market portfolio under two economic states nature as follows. For Goldday the state dependent returns are -0.06 in recession, and 0.10 in an economic boom. For the market the state dependent returns are -0.08 in recession, and 0.18 in boom. The analyst estimates that the probability of a recession is 0.50 while the probability of an economic boom is 0.50. Compute the covariance between Goldday and the market. 7111
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- 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 Mean 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 Question 2 % Return on T-Bills, Stocks and Market Index Pay- Rubber- Market made Index 10 -13 T- Bills 7 7 7 7 7 Phillips -22 -2 20 35 50 up 28 14.7 0 -10 -20 Question 1 Fill the parts in the above table that are shaded in yellow. You will notice that there are nine line items. Using the data generated in the previous question (Question 1); a) Plot the Security Market Line (SML) -10 7 45 30 1 15 29 43 b) Superimpose the CAPM's required return on the SML c) Indicate which investments will plot on, above and…An investment Analysist provide the following data regarding the possible future returns on AmDa’s common stock State of economy Probability ReturnRecession 0.25 -1.4%Normal 0.45 9.4%Boom 0.30 15.4%i. Compute the expected return on the security? ii. Compute the standard deviation on the security? iii. Compute the Coefficient of variationConsider the following information about the various states of economy and the returns of various investment alternatives for each scenario. State of the Economy Recession Below Average Average Above Average Boom Mean 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 Fill the parts in the above table that are shaded in yellow. -2 20 35 50 Pay- Rubber- up made 28 10 -10 7 45 30 14.7 0 -10 -20 Market Index -13 15 29 43
- Financial analysts have estimated the returns on shares of the Goldday Corporation and the overall market portfolio under two economic states nature as follows. For Goldday the state dependent returns are 0.06 in recession, and 0.08 in an economic boom. For the market the state dependent returns are -0.12 in recession, and 0.16 in boom. The analyst consider each state to be equally likely. Compute the correlation coefficient between Goldday and the Market.a. Determine Stock X's beta coefficient. b. Determine the arithmetic average rates of return for Stock X and the NYSE over the period given. Calculate the standard deviations of returns for both Stock X and the NYSE. c. Assume that the required return on equity, re, for Stock X is equal to its average return. Likewise, assume that the market return is equal to the NYSE's average return. Using the information calculated, what is the assumed risk-free rate in the CAPM equation? Hint: Solve algebraically for rf in, re = r¡ + B(rm – r;)Which statement is NOT correct? The distribution of returns does not affect the expected average rate of return. To find the dividend yield, we can subtract the capital gain yield from the total stock return. Average geometric return is a better indicator than the average arithmetic return for the growth. Wider the distribution of return, riskier is the investment. The current risk premium for U.S. Treasury bills is 0%.
- Assume that West Corp shares returns required in the market by investors are a function of two economic factors: S1 is 0.04 and S2 is 0.01, where risk-free rate is 7%. West shares have reaction coefficient to the factors, such that S1 = 1.3 and S2 = 0.90. Compute the expected rate of return using the arbitrage pricing model.Consider the following information about the various states of the economy and the returns of various investment alternatives for each scenario. Answer the questions that follow. Question 1 Fill in the parts in the above table that are empty. Using the data generated in the previous question (Question 1); Plot the Security Market Line (SML) 2. Superimpose the CAPM’s required return on the SML % Return on T-Bills, Stocks, and Market Index State of the Economy Probability T- Bills Phillips Pay- up Rubber- made Market Index Recession 0.2 7 -22 28 10 -13 Below Average 0.1 7 -2 14.7 -10 1 Average 0.3 7 20 0 7 15 Above Average 0.3 7 35 -10 45 29 Boom 0.1 7 50 -20 30 43 Mean Standard Deviation Coefficient of Variation Covariance with MP…You are comparing Stock A to Stock B. Given the following information, what is the difference in the expected returns of these two securities? State of Economy Probability of State of Economy Rate of Return if State Occurs Stock A Stock B Normal .75 .13 .16 Recession .25 −.05 −.21
- Let Ps be the current market price of a share of common stock of Company X. Let P; be the "fundamental" value of a share of common stock of Company X. Let r be the long-run average annual compounded rate of return on common stocks, ånd b be the long-run annual compounded rate of return on corporate bonds. Finally, let ɛ be a random error term. Which of the following equations best characterizes the Efficient Markets Hypothesis? Select one: O a. Ps = Pf + r+ ɛ O b. Ps = Pf + ɛ- b O c. Ps = (Pf + ɛ) x (r – b) O d. Ps = Pf + ɛListed below is the return probability distribution associated with the stocks of XYZ Company and the market portfolio under different states of the economy: State Recession Normal Boom 0.00452 O 0.00552 0.00652 Probability O 0.00752 0.4 0.3 0.3 XYZ Return What is the covariance between XYZ return and Market return? -3% 14% 20% Market Return 2% 8% 16%Use the following information on states of the economy and stock returns to calculate the expected return and the standard deviation of returns. Assume that all three states are equally likely. Note: Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places. State of Economy Recession Normal Boom Expected return Standard deviation Security Return if State Occurs -9.00% 15.00 24.00 % %