vv-20 - the economy will be at normal levels. What is the...

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Ch. 8 In-class Drill Problems 1. The Inferior Goods Co. stock is expected to earn 14 percent in a recession, 6 percent in a normal economy, and lose 4 percent in a booming economy. The probability of a boom is 20 percent while the probability of a normal economy is 55 percent and the chance of a recession is 25 percent. What is the expected rate of return on this stock? a. 6.00 percent b. 6.72 percent c. 6.80 percent d. 7.60 percent e. none of the above E(r) = (.20 × -.04) + (.55 × .06) + (.25 × .14) = -.008 + .033 + .035 = .06 = 6.0 percent 2. Kurt’s Adventures, Inc. stock is quite cyclical. In a boom economy, the stock is expected to return 30 percent in comparison to 12 percent in a normal economy and a negative 20 percent in a recessionary period. The probability of a recession is 15 percent. There is a 30 percent chance of a boom economy. The remainder of the time
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Unformatted text preview: the economy will be at normal levels. What is the standard deviation of the returns on Kurts Adventures, Inc. stock? a. 10.05 percent b. 12.60 percent c. 15.83 percent d. 17.46 percent e. none of the above E(r) = (.30 .30) + (.55 .12) + (.15 -.20) = .09 + .066 -.03 = .126 Var = .30 (.30 -.126) 2 + .55 (.12 -.126) 2 + .15 (-.20 -.126) 2 = .0090828 + . 0000198 + .0159414 = .025044 Std dev = .025044 = .15825 = 15.83 percent 3. The stock of Big Joes has a beta a 1.14 and an expected return of 11.6 percent. The risk-free rate of return is 4 percent. What is the expected return on the market? a. 7.60 percent b. 8.04 percent c. 9.33 percent d. 10.67 percent e. none of the above E(r) = .116 = .04 + 1.14 (r m .04); .1216 = 1.14r m ; r m = .1067 = 10.67 percent Real life Beta analysis 1...
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