There are two stocks in the market, stock A and stock B. The price of stock A today is $69. The price of stock A next year will be $57 if the economy is in a recession, $77 if the economy is normal, and $89 if the economy is expanding. The probabilities of recession, normal times, and expansion are 0.2, 0.6, and 0.2, respectively. Stock A pays no dividends and has a beta of 0.72. Stock B has an expected return of 13%, a standard deviation of 34%, a beta of 0.49, and a correlation with stock A of 0.48. The market portfolio has a standard deviation of 14%. Assume the CAPM holds. a. What are the expected return and standard deviation of stock A? (Do not round intermediate calculations. Round the final answers to 2 decimal places.) Expected return Standard deviation Stock A Stock A O Stock B % b. If you are a typical, risk-averse investor with a well-diversified portfolio, which stock would you prefer? c. What are the expected return and standard deviation of a portfolio consisting of 60% of stock A and 40% of stock B? (Do not round intermediate calculations. Round the final answers to 2 decimal places.)

Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
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There are two stocks in the market, stock A and stock B. The price of stock A today is $69. The price of stock A next year will be $57 if
the economy is in a recession, $77 if the economy is normal, and $89 if the economy is expanding. The probabilities of recession,
normal times, and expansion are 0.2, 0.6, and 0.2, respectively. Stock A pays no dividends and has a beta of 0.72. Stock B has an
expected return of 13%, a standard deviation of 34%, a beta of 0.49, and a correlation with stock A of 0.48. The market portfolio has a
standard deviation of 14%. Assume the CAPM holds.
a. What are the expected return and standard deviation of stock A? (Do not round intermediate calculations. Round the final
answers to 2 decimal places.)
Expected return
Standard deviation
O Stock A
O Stock B
Stock A
b. If you are a typical, risk-averse investor with a well-diversified portfolio, which stock would you prefer?
%
Expected return
Standard deviation
c. What are the expected return and standard deviation of a portfolio consisting of 60% of stock A and 40% of stock B? (Do not round
intermediate calculations. Round the final answers to 2 decimal places.)
%
d. What is the beta of the portfolio in (c)? (Do not round intermediate calculations. Round the final answer to 3 decimal places.)
Beta of the portfolio
Transcribed Image Text:There are two stocks in the market, stock A and stock B. The price of stock A today is $69. The price of stock A next year will be $57 if the economy is in a recession, $77 if the economy is normal, and $89 if the economy is expanding. The probabilities of recession, normal times, and expansion are 0.2, 0.6, and 0.2, respectively. Stock A pays no dividends and has a beta of 0.72. Stock B has an expected return of 13%, a standard deviation of 34%, a beta of 0.49, and a correlation with stock A of 0.48. The market portfolio has a standard deviation of 14%. Assume the CAPM holds. a. What are the expected return and standard deviation of stock A? (Do not round intermediate calculations. Round the final answers to 2 decimal places.) Expected return Standard deviation O Stock A O Stock B Stock A b. If you are a typical, risk-averse investor with a well-diversified portfolio, which stock would you prefer? % Expected return Standard deviation c. What are the expected return and standard deviation of a portfolio consisting of 60% of stock A and 40% of stock B? (Do not round intermediate calculations. Round the final answers to 2 decimal places.) % d. What is the beta of the portfolio in (c)? (Do not round intermediate calculations. Round the final answer to 3 decimal places.) Beta of the portfolio
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