1. Consider the following information on the portfolio of three stocks. returns state probability Stock A Stock B Stock C boom 10% 5% 30% 50% normal 55% 10% 10% 20% bust 35% 15% -10% -25% a. Assuming...


1. Consider the following information on the portfolio of three stocks.


returns

































stateprobabilityStock AStock BStock C
boom10%5%30%50%
normal55%10%10%20%
bust35%15%-10%-25%

a. Assuming your portfolio is invested 40% in Stock A, 30% in Stock B, and 30% in Stock C., what is the portfolio's expected return? The variance and standard deviation?


b. If the expected T-bill rate is 3%, what is the expected risk premium on the portfolio?


2. You have decided to invest in an equally-weighted portfolio of AT&T, Apple, Proctor & Gamble, and JPM Chase. Using finance.yahoo.com to find the ticker for each company and their betas. Also, use the 13-week T-bill rate for the risk-free rate.


a. Calculate the beta of the portfolio.


b. Using the average large-company stock return from 1960-2017 to estimate the market risk premium, calculate the expected return for each of the four stocks. Also, calculate the expected return for the equally-weighted portfolio.


3. Suppose the expected return on the market is 13% and the risk-free rate is 5%. You own a stock where the expected return is 12% and the stocks beta is 1.25. What do you expect to happen to the price of your stock and why?

Apr 15, 2021
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