There are two stocks in the market: Stock A and Stock B. The price of Stock A today is $68. The price of Stock A next year will be $57 if the economy is in a recession, $80 if the economy is normal, and $90 if the economy is expanding. The probabilities of recession, normal times, and expansion are .13, .67, and .20, respectively. Stock A pays no dividends and has a correlation of .63 with the market portfolio. Stock B has an expected return of 18.5 percent, a standard deviation of 33.3 percent, a correlation with the market portfolio of .17, and a correlation with Stock A of .29. The market portfolio has a standard deviation of 17.3 percent. Assume the CAPM holds.
a-1. What is the return for each state of the economy for Stock A? (Negative amount should be indicated by a minus sign. Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places (e.g., 32.16).) Return Recession % Normal % Expanding %
a-2. What is the expected return of Stock A? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places (e.g., 32.16).) Expected return %
a-3. What is the variance of Stock A? (Do not round intermediate calculations and round your final answer to 4 decimal places (e.g., 32.1616).) Variance
a-4. What is the standard deviation of Stock A? (Do not round intermediate calculations.Enter your answer as a percent rounded to 2 decimal places (e.g., 32.16).) Standard deviation %
a-5. What is the beta of Stock A? (Do not round intermediate calculations and round your final answer to 3 decimal places (e.g., 32.161).) Beta of Stock A
a-6. What is the beta of Stock B? (Do not round intermediate calculations and round your final answer to 3 decimal places (e.g., 32.161).)
Beta of Stock B If you are a typical, risk-averse investor with a well-diversified portfolio, which stock would you prefer? Stock B Stock A
b-1. What is the expected return of a portfolio consisting of 65 percent of Stock A and 35 percent of Stock B? (Do not round intermediate calculations.Enter your answer as a percent rounded to 2 decimal places (e.g., 32.16).) Expected return %
b-2. What is standard deviation of a portfolio consisting of 65 percent of Stock A and 35 percent of Stock B? (Do not round intermediate calculations.Enter your answer as a percent rounded to 2 decimal places (e.g., 32.16).) Standard deviation %
c. What is the beta of the portfolio in part (b)? (Do not round intermediate calculations and round your final answer to 3 decimal places (e.g., 32.161).) Beta of the portfolio