Chapter 10 Questions V2

Chapter 10 Questions V2 - Expected Return, Variance, and...

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Expected Return, Variance, and Covariance 10.1 Ms. Sharp thinks that the distribution of rates of return on Q-mart stock is as follows: a. What is the expected return on the stock? b. What is the standard deviation of returns on the stock? 10.2 Suppose you have invested only in two stocks, A and B . The returns on the two stocks depend on the following three states of the economy, which are equally likely to happen: a. Calculate the expected return on each stock. b. Calculate the standard deviation of returns on each stock. c. Calculate the covariance and correlation between the returns on the two stocks. 10.3 Mr. Henry can invest in Highbull stock and Slowbear stock. His projection of the returns on these two stocks is as follows: a. Calculate the expected return on each stock. b. Calculate the standard deviation of returns on each stock. c. Calculate the covariance and correlation between the returns on the two stocks. Portfolios 10.4 A portfolio consists of 120 shares of Atlas stock, which sell for $50 per share, and 150 shares of Babcock stock, which sell for $20 per share. What are the weights of the two stocks in this portfolio? 10.5 Security F has an expected return of 12 percent and a standard deviation of 9 percent per year. Security G has an expected return of 18 percent and a standard deviation of 25 percent per year. a. What is the expected return on a portfolio composed of 30 percent of Security F and 70 percent of Security G? b. If the correlation between the returns of Security F and Security G is 0.2, what is the standard deviation of the portfolio described in part a ? 10.6 Suppose the expected returns and standard deviations of stocks A and B are E(R A ) = 0.15, E(R B ) = 0.25, State of Return on Return on Economy Stock A (%) Stock B (%) Bear 6.30 -3.70 Normal 10.50 6.40 Bull 15.60 25.30 State of Probability of Q-Mart Stock Economy State Occurring Return (%) Depression 0.1 -4.5 Recession 0.2 4.4 Normal 0.5 12.0 Boom 0.2 20.7 State of Probability of Return on Return on Economy State Occurring Highbull Stock (%) Slowbear Stock (%) Recession 0.25 -2.00 5.00 Normal 0.60 9.20 6.20 Boom 0.15 15.40 7.40
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σ A = 0.1, and σ B = 0.2, respectively. a. Calculate the expected return and standard deviation of a portfolio that is composed of 40 percent A and 60 percent B when the correlation between the returns on A and B is 0.5. b. Calculate the standard deviation of a portfolio that is composed of 40 percent A and 60 percent B when the correlation coefficient between the returns on A and B is -0.5. c. How does the correlation between the returns on A and B affect the standard deviation of the portfolio? 10.7 Suppose Janet Smith holds 100 shares of Macrosoft stock and 300 shares of Intelligence stock. Macrosoft’s stock currently sells at $80 per share, while Intelligence’s stock sells at $40 per share. The expected return on Macrosoft’s stock is 15 percent, while the expected return on Intelligence’s stock is 20 percent. The correlation between the returns on the two stocks is 0.38.
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This note was uploaded on 04/04/2009 for the course FIN FIN/554 taught by Professor Timothydreyer during the Summer '06 term at University of Phoenix.

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Chapter 10 Questions V2 - Expected Return, Variance, and...

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