Quiz 5 w answers - What is the expected return for the...

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Quiz 5 BUSI 105: Spring 2008 Name ___________________________________ Use the following information to answer the problems below: A portfolio of stock that tracks the S&P index produces returns of 25% in a strong economy and -5% in a poor economy. The returns for stock of Company Z are 20% in a strong economy and -4% in a poor economy. The likelihood of a strong economy is 60%. Assume that there are only two possible scenarios – a strong economy or a poor economy.
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Unformatted text preview: What is the expected return for the portfolio of stock? For Stock Z? r market = .60 x 25% + .40 x -5% = 15%+(-2%) = 13% r stockZ = .60 x 20% + .40 x -4% = 12% + (-1.6%) = 10.4% What is the beta of Stock Z? Is Stock Z a defensive stock or an aggressive stock? Beta = 20-(-4) = .8 25-(-5) If the current T-Bill rate is 5%, what is the required return (as estimated using CAPM) for Stock Z? r = 5% + .8(13-5%) = 11.4%...
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