Return and Risk:
Consider the following scenario:
Rate of Return
Scenario Prob. Stocks Bonds
Recession .20 -5% 14%
Normal .60 15% 8%
Boom .20 25% 4%___
1. What is the expected return for each investment?
Bonds:
Stocks:
Portfolio (40% in bonds, 60% in stocks):
2. What is the risk for each investment?
Bonds:
Stocks:
Portfolio (40% in bonds, 60% in stocks):
3. Which investment do you prefer?
A. Bonds B. Stocks C. Portfolio
4. Investors expect the market return this year to be 14%. A stock with a beta of .8 has an expected return of 12%. If the market return this year turns out to be 10%, what is your best guess as to the rate of return on the stock?
Suppose that the S&P500 has an expected return of 15% and T-bills provide a risk-free rate of 5%.
5. How to construct a portfolio from these two assets with an expected return of 12%?
Weight for S&P500:
Weight for T-bills:
6. How to construct a portfolio from these two assets with a beta of .4?
Weight for S&P500:
Weight for T-bills: