Advanced Financial Management Homework-
Q1. GenLabs has been a hot stock the last few years, but is risky. The expected returns for GenLabs are highly dependent on the state of the economy as follows:
|
State of Economy
|
Probability
|
GenLabs Returns
|
|
Depression
|
.05
|
-50%
|
|
Recession
|
.10
|
-15
|
|
Mild Slowdown
|
.20
|
5
|
|
Normal
|
.30
|
15%
|
|
Broad Expansion
|
.20
|
25
|
|
Strong Expansion
|
.15
|
40
|
Please calculate the expected return and standard deviation of the stock.
Q2. A year ago, an investor invested $4,000 in the stock of IBM, $4,000 in the stock of GE, and $2,000 in the stock of Microsoft. The rate of return is 10% for IBM, 12% for GE, and 15% for Microsoft. How much is the overall rate of return for the portfolio?
Q3. Consider a portfolio that is composed of the following two securities:
|
|
Security A
|
Security B
|
|
Expected return
|
5%
|
10%
|
|
Standard deviation
|
6%
|
12%
|
(1) If you allocate 40% into A and 60% into B, how much is the expected return on the portfolio?
(2) If you allocate 30% into A and 70% into B, how much is the expected return on the portfolio?