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Unformatted text preview: Ch. 10 Solution 1. a. Expected Return HB = (0.25)(0.02) + (0.60)(0.092) + (0.15)(0.154) = 0.0733 = 7.33% The expected return on Highbull’s stock is 7.33%. Expected Return SB = (0.25)(0.05) + (0.60)(0.062) + (0.15)(0.074) = 0.0608 = 6.08% The expected return on Slowbear’s stock is 6.08%. b. Variance A ( σ HB 2 ) = (0.25)(0.02 – 0.0733) 2 + (0.60)(0.092 – 0.0733) 2 + (0.15)(0.154 – 0.0733) 2 = 0.003363 Standard Deviation A ( σ HB ) = (0.003363) 1/2 = 0.0580 = 5.80% The standard deviation of Highbear’s stock returns is 5.80%. Variance B ( σ SB 2 ) = (0.25)(0.05 – 0.0608) 2 + (0.60)(0.062 – 0.0608) 2 + (0.15)(0.074 – 0.0608) 2 = 0.000056 Standard Deviation B ( σ B ) = (0.000056) 1/2 = 0.0075 = 0.75% The standard deviation of Slowbear’s stock returns is 0.75%. c. Covariance(R HB , R SB ) = (0.25)(0.02 – 0.0733)(0.05 – 0.0608) + (0.60)(0.092 – 0.0733)(0.062– 0.0608) + (0.15)(0.154 – 0.0733)(0.074 – 0.0608) = 0.000425 The covariance between the returns on Highbull’s stock and Slowbear’s stock is...
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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.
 Spring '08
 NA
 Corporate Finance

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