Reference no: EM132046194

a) There is a 45% probability of a below average economy and a 55% probability of an average economy. If there is a below average economy stocks A and B will have returns of 6% and -3%, respectively. If there is an average economy stocks A and B will have returns of 17% and 17%, respectively. Calculate the expected returns and standard deviations of stocks A and B.

b) There is a 40% probability of an average economy and a 60% probability of an above average economy. You invest 42% of your money in Stock S and 58% of your money in Stock T. In an average economy the expected returns for Stock S and Stock T are 12% and 8%, respectively. In an above average economy the the expected returns for Stock S and T are 12% and 10%, respectively. What is the expected return for this two stock portfolio?

c) You are invested 14% in growth stocks with a beta of 1.9, 14% in value stocks with a beta of 1, and 72% in the market portfolio. What is the beta of your portfolio?

d) A banker gathered the following information for a stock and market parameters: stock beta = 0.5 expected return on the Market = 14.8%; expected return on T-bills = 6.3%; current stock Price = $8.51; expected stock price in one year = $13.37; expected dividend payment next year = $1.14. Calculate the required return and expected return for this stock.

e) The expected return for the market next period is 5.4% and the risk-free rate is 3%. Stock Z has a beta of 1 and an expected return of 10.1%. What is the reward-to-risk ratio for the market portfolio and Stock Z.