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Assignment 2 Solutions

# Assignment 2 Solutions - Assignment II COMM 308 Due on...

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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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Assignment 2 Solutions - Assignment II COMM 308 Due on...

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