How to calculate a,b and c?
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Probability of the state of economy
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Rate of return if state occurs
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StockA
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StockB
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StockC
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boom
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0,2
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0,4
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-0,04
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0,12
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good
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0,3
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0,2
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0,05
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0,08
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poor
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0,4
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0,04
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0,1
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0,02
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bust
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0,1
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-0,06
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0,14
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0
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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?