1. You make the following forecasts about the returns of a stock: in a recession (probability 40%) the stock's return is -6%, in a boom (probability 60%) the stock's return is 10%. What is the expected return for this stock?
2. What is the standard deviation of returns for the stock in question 3?
3. You own a portfolio that is invested 38 percent in Stock A, 43 percent in Stock B, and the remainder in Stock C. The expected returns on these stocks are 10.9 percent, 15.4 percent, and 9.1 percent, respectively. What is the expected return on the portfolio?
4. You own a portfolio of investment in two stocks, A and B. Total investment in stock A is valued at $6,500 and has an expected return of 11.2 percent. Stock B has an expected return of 8.1 percent. Total investment in stock B is $3,500. What is the expected return on the portfolio?
5. Continuing from question 6, the standard deviation of stock A is 15%, while the standard deviation of stock B is 12%. If the two stocks have a correlation of -0.5, what is the standard deviation of the portfolio? How does this portfolio standard deviation compare to the standard deviation of stock A and stock B separately? Why is the portfolio standard deviation lower?
6. Wal-Mart stock's beta is 0.40. The current risk-free rate is 0.5%. The return on the S&P 500 is 7%. What is the expected return for Wal-Mart stock? What are the 3 components of Wal-Mart stock’s expected return?