10_Sol - Ch. 10 Solution 1. a. Expected Return HB =...

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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 Highbulls 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 Slowbears stock is 6.08%. b. Variance A ( 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 ( HB ) = (0.003363) 1/2 = 0.0580 = 5.80% The standard deviation of Highbears stock returns is 5.80%. Variance B ( 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 ( B ) = (0.000056) 1/2 = 0.0075 = 0.75% The standard deviation of Slowbears 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 Highbulls stock and Slowbears stock is...
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10_Sol - Ch. 10 Solution 1. a. Expected Return HB =...

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