|
|
Probability of the state of economy
|
Rate of return if state occurs
|
|
StockA StockB
|
StockC
|
|
boom
|
0,2
|
0,4
|
-0,04
|
0,12
|
|
good
|
0,3
|
0,2
|
0,05
|
0,08
|
|
poor
|
0,4
|
0,04
|
0,1
|
0,02
|
|
bust
|
0,1
|
-0,06
|
0,14
|
0
|
a. Calculate the expected return of each stock.
b. Calculate the variance and standard deviation of each stock.
c. Calculate the expected return of the portfolio (Portfolio1) consisting 40% of stock A, 40% of stock B and 20% of stock C.
d. Calculate the variance and standard deviation of this portfolio.
e. Consider an alternative portfolio (Portfolio2) 40% of stock A, 20% of stock B, 10% of stock C and 30% in the risk-free asset. Risk-free asset expected return is 2%. What is this portfolio's expected return, variance and standard deviation?
f. Based on CAPM calculate each stock beta if market risk premium is 5%.
g. Which stock has the lowest systematic risk? Which stock has the lowest total risk? Which stock is "safest"? Explain.
h. What is the beta of the Portfolio1 and Portfolio2?