Calculate the expected return for the stock

Reference no: EM1347853

An individual has the following utility function:
u(w) = w.5 where w = wealth.

a. Using expected utility, order the following
prospects in terms of preference,
from the most to the least preferred:
P1(.8, 1,000, 600)
P2(.7, 1,200, 600)
P3(.5, 2,000, 300)
b. What is the certainty equivalent for
prospect P2?
c. Without doing any calculations, would
the certainty equivalent for prospect P1
be larger or smaller? Why?

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A stock has a beta of 1.2 and the standard deviation
of its returns is 25%. The market risk
premium is 5% and the risk-free rate is 4%.

a. What is the expected return for the
stock?
b. What are the expected return and standard
deviation for a portfolio that is
equally invested in the stock and the
risk-free asset?
c. A financial analyst forecasts a return of
12% for the stock. Would you buy it?
Why or why not?

Reference no: EM1347853

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