Concept explainers
a.
To determine: Choosing between the two stocks.
Introduction: Expected Return is a process of estimating the
a.
Answer to Problem 37QP
Solution: Stock B should be chosen.
Explanation of Solution
Determine the Stock Return for each state of economy
Generally a risk-averse investor expects greater return and less risks. A risk-averse investor who holds a portfolio that is well-diversified, beta is the fitting measure of the risk of an individual security. To choose between the two stocks we need to calculate the beta and expected return of the two stocks. As Stock A does not pay any dividend and the return on Stock A is,
Therefore the Stock Return for Recession is -14.70%, Normal is 16% and Expansion is 29.30%
Determine the Expected Return for Stock A
Therefore the Expected Return for Stock A is 12.53%
Determine the Variance for Stock A
Therefore the Variance for Stock A is 0.021163
Determine the Standard Deviation for Stock A
Therefore the Standard Deviation for Stock A is 14.55%
Determine the Beta for Stock A
Therefore the Beta for Stock A is 0.57
Determine the Beta for Stock B
Therefore the Beta for Stock A is 0.45
Result:
Stock A has an expected return lower than Stock B. A stock’s beta is determined using the beta of the stock. Stock A’s beta is higher than Stock B. A risk-averse investor who holds a well-diversified portfolio should chose Stock B because in this condition it explains that at least one of the stocks is not priced correctly due to greater beta or greater risk. The stock has a low return than the low risk of the stock.
b.
To determine: The Expected Return and Standard Deviation of Portfolio.
b.
Answer to Problem 37QP
Solution: The Expected Return is 12.97% and Standard Deviation of Portfolio is 16.81%.
Explanation of Solution
Determine the Expected Return on Portfolio
Therefore the Expected Return on Portfolio is 12.97%
Determine the Variance on Portfolio
Therefore the Variance on Portfolio is 0.028257
Determine the Standard Deviation on Portfolio
Therefore the Standard Deviation is 16.81%.
c.
To determine: The Beta of Portfolio.
c.
Answer to Problem 37QP
Solution: The Beta of Portfolio is 0.532.
Explanation of Solution
Determine the Beta of Portfolio
Therefore the Beta of Portfolio is 0.532
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Chapter 11 Solutions
UPENN: LOOSE LEAF CORP.FIN W/CONNECT
- Suppose your expectations regarding the stock price are as follows: State of the Market Boom Normal growth Recession Probability 0.35 0.30 0.35 Ending Price $140 110 80 HPR (including dividends) 44.5% 14.0 -16.5 Use Equations 5.11 and 5.12 to compute the mean and standard deviation of the HPR on stocks.arrow_forwardConsider the following information on Stocks I and II: State of Economy Recession Normal Irrational exuberance. Probability of State) of Econony 15 .70 .15 a. Stock I beta Stock Il beta. b. Stock I standard deviation Stock Il standard deviation Rate of Return if State Occurs. Stock I Stock II 05 18 07 The market risk premium is 7 percent, and the risk-free rate is 3.5 percent. a. Calculate the beta of each stock. Note: Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16. b. Calculate the standard deviation of each stock. c. More systematic nsk d. More unsystematic risk e. "Riskier stock Note: Do not round intermediate calculations and enter your answers as a percent rounded to 2 decimal places, e.g., 32.16. c. Which stock has the most systematic risk? d. Which one has the most unsystematic risk? e. Which stock is "riskler"? -.21 .10 39 % %arrow_forwardConsider the following information: Probability of State of Economy .22 .57 .21 Economy Recession Normal Boom Rate of Return if State Occurs. Stock A Stock B a. Expected return of A Expected return of B b. Standard deviation of A Standard deviation of B .020 .100 160 a. Calculate the expected return for the two stocks. Note: Do not round intermediate calculations and enter your answers as a percent rounded to 2 decimal places, e.g., 32.16. b. Calculate the standard deviation for the two stocks. Note: Do not round intermediate calculations and enter your answers as a percent rounded to 2 decimal places, e.g., 32.16. % % -.27 .17 .40 % %arrow_forward
- Consider the following information: State of Economy Probability of State of Economy Recession .15 Normal Boom .60 .25 Rate of Return if State Occurs Stock A .06 .09 14 Stock B -.19 .10 .27 Check a. Calculate the expected return for Stocks A and B. (Do not round intermediate calculations and enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.) b. Calculate the standard deviation for Stocks A and B. (Do not round intermediate calculations and enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.) k a. Stock A expected return a. Stock B expected return b. Stock A standard deviation b. Stock B standard deviation % % % %arrow_forwardConsider the following information: Probability of State of Economy .20 .60 .20 Economy Recession Normal Boom Rate of Return if State Occurs Stock A Stock B .035 .115 .290 a. Calculate the expected return for the two stocks. Note: Do not round intermediate calculations and enter your answers as a percent rounded to 2 decimal places, e.g., 32.16. b. Calculate the standard deviation for the two stocks. Note: Do not round intermediate calculations and enter your answers as a percent rounded to 2 decimal places, e.g., 32.16. a. Expected return of A Expected return of B b. Standard deviation of A Standard deviation of B do do do do % % % % -.40 .30 .53arrow_forward(Expected return and standard deviation) What is the expected return and standard devia- tion of the return for the next year on a stock that is selling for $30 now and has probabil- ities of 0.2, 0.6, and 0.2 of selling one year from now at $24, $33, and $39, respectively? Assume that no dividends will be paid on the stock during the next year and ignore taxes?arrow_forward
- Suppose your expectations regarding the stock price are as follows: State of the Market Boom Normal growth Recession Probability Ending Price 0.26 $ 140 0.25 110 0.49 80 Use the equations E (r) = Ep (s) r(s) and o² = Ep (s) [r(s) — E(r)]² to compute the mean and standard deviation of the HPR on - S S Mean Standard deviation HPR (including dividends) 55.0% 21.0 -16.0 stocks. Note: Do not round intermediate calculations. Round your answers to 2 decimal places. % %arrow_forwardSuppose your expectations regarding the stock price are as follows: State of the Market Probability Ending Price HPR (including dividends) Boom 0.35 $140 44.5% Normal growth 0.30 110 14.0 Recession 0.35 80 -16.5 Use the following equations to compute the mean and standard deviation of the HPR on stocks:arrow_forwardSuppose your expectations regarding the stock price are as follows: HPR (including dividends) State of the Market Boom Normal growth Recession Probability Ending Price 0.35 0.30 0.35 Mean Standard deviation Use the equations E (r) = Ep (s) r(s) and o² = Ep (s) [r(s) – E(r)]² to compute the mean and standard deviation of the HPR S S on stocks. Note: Do not round intermediate calculations. Round your answers to 2 decimal places. do do $ 140 110 80 % 44.5% 14.0 -16.5 %arrow_forward
- Suppose your expectations regarding the stock price are as follows: State of the Market Boom Normal growth Recession HPR (including Probability Ending Price dividends 0.20 $ 140 47.5% 0.29 110 13.0 0.51 80 -20.0 Use the equations E (r) = Ep (s) r(s) and o² = Σp (s) [r(s) – E(r)]² to compute the mean and standard deviation of the HPR on stocks. Note: Do not round intermediate calculations. Round your answers to 2 decimal places. Mean Standard deviation % %arrow_forward2. Based on the following information calculate the expected return and standard deviation for the two stocks: State of economy Probability of state of economy Rate of return if state occur Stock A Stock B -.17 .12 .29 Recession Normal Boom 3. How should the price of a stock change when it goes ex-dividend? 4. Suppose stock in Gamma Air Freight has a beta of 1.25. the market risk premium is 7% and the risk free rate is 6%. Alpha's last dividend was $2 per share and the dividend is expected to grow at 8% indefinitely. The stock currently sells for $30. What is Gamma's cost of equity capital? .05 .65 .30 .05 .08 .13arrow_forwardYou have been given the following information: State of Economy Recession Normal Boom Probability of Rate of Return if State Occurs State of Economy Stock A Stock B .16 .04 -.20 .61 .23 .08 .09 .15 .26 a. Calculate the expected return for the two stocks. (Do not round intermediate calculations and enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.) b. Calculate the standard deviation for the two stocks. (Do not round intermediate calculations and enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.) > Answer is complete but not entirely correct. a. Stock A expected return a. Stock B expected return b. Stock A standard deviation 8.97% 12.10% b. Stock B standard deviation 3.59 % 14.05 %arrow_forward
- EBK CONTEMPORARY FINANCIAL MANAGEMENTFinanceISBN:9781337514835Author:MOYERPublisher:CENGAGE LEARNING - CONSIGNMENT