Stocks A and B have the following historical returns: Year Stock A's Returns 2015 (24.25%) 2016 18.50 2017 38.67 2018 14.33 2019 39.13 Assume the risk-free rate during this time was 3.5%. What are the Sharpe ratios for Stocks A and B and the portfolio over this time period using their average returns? Answers: a) Sharpe ratio for Stock A- b) Sharpe ratio for Stock B 0.5332 0.8839 Stock B's Returns 5.50% 26.73 48.25 (4.50) 43.86 c) Sharpe ratio for Portfolio AB
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- Consider the rate of return of stocks ABC and XYZ. Year rABC rXYZ 1 20 % 28 % 2 8 11 3 16 19 4 4 1 5 2 −9 a. Calculate the arithmetic average return on these stocks over the sample period. b. Which stock has greater dispersion around the mean return? A. ABC B. XYZ c. Calculate the geometric average returns of each stock. What do you conclude? (Do not round intermediate calculations. Round your answers to 2 decimal places.) d. If you were equally likely to earn a return of 20%, 8%, 16%, 4%, or 2%, in each year (these are the five annual returns for stock ABC), what would be your expected rate of return? (Do not round intermediate calculations.) e. What if the five possible outcomes were those of stock XYZ? f. Given your answers to (d) and (e), which measure of average return, arithmetic or geometric, appears more useful for predicting future performance? A. Arithmetic B. GeometricStocks A and B have the following historical returns: Year Stock A’s Returns Stock B’s Returns 2015 (24.25%) 5.50% 2016 18.50 26.73 2017 38.67 48.25 2018 14.33 (4.50) 2019 39.13 43.86 Assume the risk-free rate during this time was 3.5%. What are the Sharpe ratios for Stocks A and B and the portfolio over this time period using their average returns? Answers: a) Sharpe ratio for Stock A = b) Sharpe ratio for Stock B = c) Sharpe ratio for Portfolio AB =Consider the rate of return of stocks ABC and XYZ. Year rABC rXYZ 1 20 % 28 % 2 8 11 3 16 19 4 4 1 5 2 −9 (PLEASE SKIP THE FIRST THREE QUESTIONS) a. Calculate the arithmetic average return on these stocks over the sample period. b. Which stock has greater dispersion around the mean return? multiple choice A. ABC B. XYZ c. Calculate the geometric average returns of each stock. What do you conclude? (Do not round intermediate calculations. Round your answers to 2 decimal places.) d. If you were equally likely to earn a return of 20%, 8%, 16%, 4%, or 2%, in each year (these are the five annual returns for stock ABC), what would be your expected rate of return? (Do not round intermediate calculations.) e. What if the five possible outcomes were those of stock XYZ? f. Given your answers to (d) and (e), which measure of average return, arithmetic or geometric, appears more useful for predicting future…
- Consider the following information about two stocks (D and E) and two common risk factors (factor 1 and factor 2) Stock Risk factor 1 Risk factor 2 Expected return (%) D 1.2 3.4 13.1 2.6 2.6 15.4 a. Assuming that the risk free rate is 5%, determine the risk premium for factors 1 and 2 that are consistent with the expected returns for the two stocks. You expect that in one year the prices of Stock D and E will be $55 and $36 respectively and pay no dividends. What should be the price of each stock today to be consistent with the expected return levels. b. C. Determine how to you identified if Stock D and E are overvalued, fairly valued and undervalued? d. Suppose the risk premium for factor 1 as computed in (a) increases by 0.25 percent, what will be the new expected return for D and E? e. Suppose the risk premium for factor 1 as computed in (a) decreases by 0.25%, what will be the new expected return for D and E? f. Devise how would you develop a Jensen Index using Arbitrage Pricing…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.Consider the following average annual returns for Stocks A and B and the Market. Which of the possible answers best describes the historical betas for A and B? Years Market Stock A Stock B 1 0.03 0.16 0.05 2 −0.05 0.20 0.05 3 0.01 0.18 0.05 4 −0.10 0.25 0.05 5 0.06 0.14 0.05 a. bA > +1; bB = 0. b. bA = 0; bB = −1. c. bA < 0; bB = 0. d. bA < −1; bB = 1. e. bA > 0; bB = 1.
- a. Based on the following information, calculate the expected return and standard deviation for each of the following stocks. What are the covariance and correlation between the returns of the two stocks? Calculate the portfolio return and portfolio standard deviation if you invest equally in each asset. Returns State of Economy Prob K Recession 0.25 -0.02 0.034 Normal 0.6 0.138 0.062 Boom 0.15 0.218 0.092 b. A portfolio that combines the risk-free asset and the market portfolio has an expected return of 7 percent and a standard deviation of 10 percent. The risk-free rate is 4 percent, and the expected return on the market portfolio is 12 percent. Assume the capital asset pricing model holds. What expected rate of return would a security earn if it had a .45 correlation with the market portfolio and a standard deviation of 55 percent? c. Suppose the risk-free rate is 4.2 percent and the market portfolio has an expected return of 10.9 percent. The market portfolio has a variance of…Suppose that index model for Stocks A and B is estimated from excess returns with the following results: Ra= 0.04+0.6Rm+ea, Rb= -0.04+1.3Rm+eb, Risk on the market is 30%, R-squared of A is 30%, R-squared of B is 40%, systematic risk for B is Select one: O a. 1521 O b. 1115 O c.914 O d. 1345he table below shows information for 3 stocks. Security Beta Risk-free rate Expected market return Stock 1 1.9 0.02 0.09 Stock 2 1.2 0.035 0.09 Stock 3 0.2 0.015 0.09 The risk-free rates are different because they were measured in different years. Calculate the expected (or required) return for each stock, using the Capital Asset Pricing Model (CAPM). What is the required return for stock 1? What is the required return for stock 2? What is the required return for stock 3?
- Based on the following information, calculate the expected return and standard deviation for each of the following stocks. What are the covariance and correlation between the returns of the two stocks? Calculate the portfolio return and portfolio standard deviation if you invest equally in each asset. Returns State of Economy Prob J K Recession 0.25 -0.02 0.034 Normal 0.6 0.138 0.062 Boom 0.15 0.218 0.092a. Based on the following information, calculate the expected return and standard deviation for each of the following stocks. What are the covariance and correlation between the returns of the two stocks? Calculate the portfolio returm and portfolio standard deviation if you invest equally in each asset. Returns State of Economy Prob J K Recession 0.25 -0.02 0.034 Normal 0.6 0.138 0.062 Boom 0.15 0.218 0.092 b. A portfolio that combines the risk-free asset and the market portfolio has an expected return of percent and a standard deviation of 10 percent. The risk-free rate is 4 percent, and the Page 7 of 33 expected return on the market portfolio is 12 percent. Assume the capital asset pricing model holds. What expected rate of return would a security earn if it had a 45 corelation with the market portfolio and a standard deviation of 55 percent? C. Suppose the risk-free rate is 4.2 percent and the market portfolıo has an expected return of 10.9 mercent Tibemadkat normfeliobasiabiamance…You are given the following partial covariance and correlation tables from historical data: Securities J K Market Securities J K Market 1.24 1.11 1.17 1.03 Covariance Matrix K 0.90 J 0.0020480 0.0021600 Also, you have estimated that the market's standard deviation is 4.3 percent. For the coming year, the expected return on the market is 14.0 percent and the risk-free rate is expected to be 4.0 percent. Given this information, determine the beta for Security K for the coming year, assuming CAPM is the correct model for required returns. Correlation Matrix K 0.60 1.00 0.90 1.00 0.60 0.80 Market 0.0020480 0.0021600 Market 0.80 0.90 1.00 Ston sharing Hidel lines We