Assignment II
COMM 308
Due on November 11 in the class
Answer questions 1 to 7 using the table below.
State of economy
Probability
Return on Stock X
Return on Stock Y
Boom
30%
25%
20%
Normal
60%
10%
20%
Recession
10%
15%
10%
1. What is the expected return on Stock X?
A. 16%
B. 14%
C. 12%
D. 10%
Solution: 0.30 x 25% + 0.60 x 10% + 0.10 x 15% = 12%
2. What is the expected return on Stock Y?
A.
7%
B. 8%
C. 9%
D. 10%
Solution: 0.30 x 20% + 0.60 x 20% + 0.10 x 10% = 7%
3. What is the standard deviation of returns of Stock X?
A. 14.515%
B. 12.700%
C.
11.225%
D. None of the above
Solution: [(25%  12%)
2
x 0.30 + (10%  12%)
2
x 0.60 + (15%  12%)
2
x 0.10]
0.5
=
11.225%
4. What is the standard deviation of returns of Stock Y?
A. 14.688%
B. 15.112%
C. 16.913%
D.
17.917%
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2
x 0.30 + (20%  7%)
2
x 0.60 + (10%  7%)
2
x .010]
0.50
=
17.917%
5. What is the covariance of returns of Stock X and Stock Y?
A.
129%
2
B. 143%
2
C. 162%
2
D. None of the above
Solution: (25%  12%)(20%  7%)(0.30) + (10%  12%)((20%  7%)(0.60) + (15%

12%)(10%  7%)(0.10) = 129%
2
6. What is the correlation coefficient of returns of Stock X and Stock Y?
A. 0.837
B.
0.641
C. 0.588
D. 0.835
Solution: 129%
2
/ (11.225% x 17.917%) = 0.641
7. Suppose $10,000 are invested in Stock X and $20,000 in Stock Y. What is the
standard deviation of returns of this portfolio?
A. 10.885%
B.
9.967%
C. 8.762%
D. None of the above
Solution: Weight of Stock X = 10,000/(10,000 + 20,000) = 1/3
Weight of Stock Y = 20,000/(10,000 + 20,000) = 2/3
Portfolio standard deviation = [(1/3)
2
x (11.225%)
2
+ (2/3)
2
x (17.917%)
2
+ 2 x (1/3) x
(2/3) x 129%
2
]
0.5
= 9.967%
8. Which of the following statements are true?
i.
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 Fall '10
 RaviMateti
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