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Expected return and standard deviation

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1-Portfolio expected return you have 10,000 to invest ion a stock portifolio. Your choices are stock x with an expected return of 14 percent and stock y with an expected return of 9 percent .If your goal is creat a portfolio with an expected return of 12.2 percent, how much money will you invest in stock x ? In Stock y ?

2-Calculating expected return based on the following information, calculate the expected rate of return:

State of Economy Probability of state of economy Rate of return if state Occurs

Recession .20 -.05
Norma .50 .12
Boom .30 .25

3-Calculate return and standard deviation based on the following information, calculate the expected return and standard deviation for the two stocks

State of Economy Probability of state of economy Rate of return if state Occus
StockA StockB
Recession .10 .06 -.20
Normal .60 .07 .13
Boom .30 .11 .33

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The solution explains how to calculate the expected return and standard deviation given the probabilities

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Week 6 - Problem 1

10.6 Suppose the expected returns and standard deviations of stocks A and B are E(RA) = 0.17, E(RB) = 0.27, StdDevA = 0.12, and StdDevB = 0.21, respectively.

a. Calculate the expected return and standard deviation of a portfolio that is composed of 35 percent A and 65 percent B when the correlation between the returns on A and B is 0.6.

b. Calculate the standard deviation of a portfolio that is composed of 35 percent A and 65 percent B when the correlation coefficient between the returns on A and B is -0.6.

c. How does the correlation between the returns on A and B affect the standard deviation of the portfolio?

Week 6 - problem 2

Suppose the expected return on the market portfolio is 14.7 percent and the risk-free rate is 4.9 percent. Morrow Inc.stock has a beta of 1.3 . Assume the capital-asset-pricing model holds.

a. What is the expected return on Morrow's stock?

b. If the risk-free rate decreases to 4 percent, what is the expected return on Morrow's stock?

Week 6 - Problem 3

A portfolio that combines the risk-free asset and the market portfolio has an expected return of 22 percent and a standard deviation of 5 percent. The risk-free rate is 4.9 percent, and the expected return on the market portfolio is 19 percent. Assume the capital-asset-pricing model holds.

What expected rate of return would a security earn if it had a 0.6 correlation with the market portfolio and a standard deviation of 3 percent?

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