Explore BrainMass
Share

Explore BrainMass

    Predicting the Value of Two Stocks

    This content was COPIED from BrainMass.com - View the original, and get the already-completed solution here!

    6) There are two stocks in the market, stock A and stock B. The price of stock A today is $75. The price of stock A next year will be $63 if the economy is in a recession, $83 if the economy is normal, and $96 if the economy is expanding. The probabilities of recession, normal times, and expansion are .2, .6, and .2 respectively. Stock A pays no dividends and has a correlation of .8 with the market portfolio. Stock B has an expected return of 13%, a standard deviation of 34%, a correlation with the market portfolio of .25, and a correlation with stock A of .48. The market portfolio has a standard deviation of 18%. Assume CAPM holds.

    a. If you are a typical, risk adverse investor with a well-diversified portfolio, which of the stocks would you prefer to hold? Why?
    b. What are the expected return and standard deviation of a portfolio consisting of 70% stock A and 30% of stock B?
    c. What is the beta of the portfolio in part b.?

    © BrainMass Inc. brainmass.com October 10, 2019, 6:02 am ad1c9bdddf
    https://brainmass.com/business/options/predicting-value-two-stocks-526334

    Solution Preview

    6) There are two stocks in the market, stock A and stock B. The price of stock A today is $75. The price of stock A next year will be $63 if the economy is in a recession, $83 if the economy is normal, and $96 if the economy is expanding. The probabilities of recession, normal times, and expansion are .2, .6, and .2 respectively. Stock A pays no dividends and has a correlation of .8 with the market portfolio. Stock B has an expected return of 13%, a standard deviation of 34%, a correlation with the market portfolio of .25, and a correlation with stock A of .48. The market portfolio has a standard deviation of 18%. Assume CAPM ...

    Solution Summary

    The expert predicts the value of two stocks.

    $2.19