10_Ex - What is the portfolio beta 4 Suppose the expected...

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Ch. 10 Exercise 1. Mr Henry can invest in Highbull stock and Slowbear stock. His projection of the returns on these two stocks is as follows: State of the economy Probability Retun on Highbull (%) Retun on Slowbear (%) Recession 0.25 -2.00 5.00 Normal 0.60 9.20 6.20 Boom 0.15 15.40 7.40 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. 2. A portfolio consists of 120 shares of Atlas and stock which sells for $50 per share, and 150 shares of Babcock stock which sell for $20 per share. a) What are the weights of the two stocks in this portfolio? b) If the expected returns of Atlas and Babcock are 10% and 20% respectively, what is the expected return on the portfolio? 3. You own a stock portfolio invested 25% in stock Q, 20% in stock R, 15% in stock S, and 40% in stock T. The betas for these four stocks are 0.6, 1.70, 1.15, and 1.90 respectively.
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Unformatted text preview: What is the portfolio beta? 4. Suppose the expected returns and standard deviations of stocks A and B are E(R A ) = 0.15, E(R B ) = 0.25, σ A = 0.40 and σ B = 0.65 respectively. a) Calculate the expected return and standard deviation of a portfolio composed of 40% A and 60% B when the correlation between the returns on A and B is 0.5. b) Calculate the standard deviation of the portfolio when the correlation is -0.5. c) How does the correlation between the returns on A and B affect the standard deviation of the portfolio? 5. Suppose the risk free rate is 6.2% and the market portfolio has an expected return of 14.8%. The market portfolio has a variance of 0.0498. Stock Z has a correlation coefficient with the market of 0.45 and a variance of 0.1783. According to the capital asset pricing model, what is the expected return on stock Z?...
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This note was uploaded on 10/24/2008 for the course FIN 396002 taught by Professor Na during the Spring '08 term at Auckland University of Technology.

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10_Ex - What is the portfolio beta 4 Suppose the expected...

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