xtrarisk.ppt
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Risk-Return Problems
7. Calculating Returns and DeviationsBased on the followinginformation, calculate the expected return and standard deviationfor the two stocks. Find covariance and correlation between thetwo stocks.
Answer: AB= 0.0103
AB= 0.9953
State of Economy Probability of State Stock A Return Stock B Return
Recession 0.15 0.02 -0.15
Normal 0.60 0.09 0.18
Boom 0.25 0.18 0.50
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Risk-Return Problems
10.Returns and DeviationsConsider the following information:
a. Your portfolio is invested 30 percent in A and C, and 40 percent
in B. What is the portfolio expected return?
b. What is the variance of this portfolio? The standard deviation?
Answer:E(kP)= 0.08765
2P= 0.008338
P= 0.091
State of Economy Probability of State Stock A Return Stock B Return Stock C Return
Boom 0.20 0.10 0.20 0.35
Good 0.50 0.07 0.10 0.15
Poor 0.25 0.04 0.00 -0.05Bust 0.05 0.00 -0.08 -0.40
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Risk-Return Problems
30. Portfolio Returns and DeviationsGiven the following information on aportfolio of three stocks:
a. If your portfolio is invested 30 percent in A and B and 40 percent
in C, what is the portfolio expected return? The variance? The
standard deviation?
b. If the expected T-bill rate is 5.25 percent, what is the expected risk
premium on the portfolio?
c. If the expected inflation rate is 5 percent, what is the expected real
return on the portfolio? What is the expected real risk premium on
the portfolio?Answer: a) expected return=0.1875 standard deviation=0.2426
b)premium=0.135
c)portfolio expected real return=0.13095 real premium=0.12857
State of Economy Probability of State Stock A Return Stock B Return Stock C Return
Boom 0.20 0.20 0.30 1.00
Normal 0.70 0.10 0.05 0.30
Bust 0.10 0.00 -0.20 -0.80
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Risk-Return Problems
32. Analyzing a PortfolioYou have $100,000 to invest in either
Stock D, Stock F, or a risk-free asset. You must invest all of your
money. Your goal is to create a portfolio that has an expected
return of 10 percent and is only 60 percent as risky as the overall
market. If D has an expected return of 20 percent and a beta of
1.5, F has an expected return of 15 percent and a beta of 1.15 and
the risk-free rate is 5 percent, how much money will you invest in F?
Answer: $66,667 investment in F
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Risk-Return Problems
33. Systematic versus Unsystematic RiskGiven the followinginformation on stocks A and B:
The market risk premium is 8 percent and the risk-free rate is 6
percent. Which stock has the most systematic risk? Which one hasthe most unsystematic risk? Which stock is riskier? Explain.
Answer: A has more systematic risk
B has more unsystematic risk
State of Economy Probability of State Stock A Return Stock B Return
Recession 0.15 0.14 -0.18Normal 0.60 0.24 0.10
Boom 0.25 0.28 0.40
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