Reference no: EM133006697
Question - A. AmDa's common stock has a beta of 1.4. The market risk premium is 5% and the riskfree rate is 2%. What is the required rate of return on this stock according to CAPM?
B. An investment Analysist provide the following data regarding the possible future returns on AmDa's common stock:
|
State of economy
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Probability
|
Return
|
|
Recession
|
0.25
|
-1.4%
|
|
Normal
|
0.45
|
9.4%
|
|
Boom
|
0.30
|
15.4%
|
i. Compute the expected return on the security?
ii. Compute the standard deviation on the security?
iii. Compute the Coefficient of variation?
C. Given the results of A. & B. above, explain to an investor whether to Buy, Sell or Hold AmDa's common stock.
D. You have recently received $400,000 and you are considering investing $250,000 in the WIG and the remainder in TJH. Your analysis of each stock revealed the following information. The Expected Returns of both companies are 8% and 6% respectively and the Standard Deviations are 7% and 9% respectively. The correlation between the companies is 0.5.
i. Compute the expected return of the portfolio.
ii. Compute the standard deviation of the portfolio.
E. Given the results of D and any other computations, you deem relevant from the information presented, explain whether a rational risk-averse investor would prefer to invest in the suggested portfolio or 100% in WIG or 100% in TJH.