4. Portfolio Expected Return. You have $10,000 to invest in a stock portfolio. Your choices are Stock X with an expected return of 14 percent and Stock Y with an expected return of 11 percent. If your goal is to create a portfolio with an expected return of 12.4 percent, how much money will you invest in Stock X? In Stock Y?
7. Calculating Returns and Standard Deviations. 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 occurs: Stock A Stock B
Recession .15 .02 -.30
Normal .55 .10 .18
Boom .30 .15 .31
17. Using CAPM. A stock has a beta of 1.15 and an expected return of 10.4 percent. A risk-free asset currently earns 3.8 percent.
a. What is the expected return on a portfolio that is equally invested in the two assets?
b. If a portfolio of the two assets has a beta of .7, what are the portfolio weights?
c. If a portfolio of the two assets has an expected return of 9 percent, what is its beta?
d. If a portfolio of the two assets has a beta of 2.3, what are the portfolio weights? How do you interpret the weights for the two assets in this case? Explain.
29. SML Suppose you observe the following situation:
State of economy probability of state Rate of return if state occurs: Stock A Stock B
Recession .10 -.12 -.05
Normal .65 .09 .10
Boom .25 .35 .21
a. Calculate the expected return on each stock.
b. Assuming the capital asset pricing model holds and stock A’s beta is greater than stock B’s beta by .25, what is the expected market risk premium?
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