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17 Aug What is the expected return for the stock if the expected market risk premium is 8%?

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1)

Part 1

Diversification is _____. It _____.

2)

Part 1

As different securities are added to a portfolio, the portfolio’s total risk _____.

3)

Intro

Nautilus Clothing’s stock has a 40% chance of producing a 15% return, a 20% chance of producing a 18% return, and a 40% chance of producing a -13% return.

Part 1

What is the stock’s expected return?

4)

Intro

The table below shows the expected rates of return for three stocks and their weight in some portfolio:

  Stock A Stock B Stock C
Expected return 0.08 0.03 0.12
Weight 0.2 0.2 0.6

Part 1

What is the expected portfolio return

5)

Intro

The table below shows the expected rates of return for three stocks and their weights in some portfolio:

    Stock A Stock B Stock C
  Portfolio weights 0.4 0.2 0.4
State Probability   Expected returns  
Recession 0.3 0.06 0.03 0.15
Boom 0.7 0.11 0.05 0.16

Part 1

What is the portfolio return during a recession?

Part 2

What is the expected portfolio return?

Part 3

What is the standard deviation of the portfolio returns?

6)

Part 1

Securities whose prices move less than the market have _____ betas.

7)

Intro

The table below shows the betas and portfolio weights for 3 stocks:

    Portfolio weights
Stock Beta Portfolio 1 Portfolio 2
A 1.7 0.3 0.1
B 1.1 0.5 0.4
C 0.4 0.2 0.5

Calculate the beta of each portfolio.

Part 1

What is the beta of portfolio 1?

Part 2

What is the beta of portfolio 2?

Part 3

If you are more concerned about risk than return, which portfolio should you pick?

8)

Intro

You’ve assembled the following portfolio:

Stock Expected return Beta Portfolio weight
1 0.074 1.8 0.2
2 0.053 1.1 0.5
3 0.047 0.9 0.3

Part 1

What is the beta of the portfolio?

Part 2

What is the expected return of your portfolio?

9)

Part 1

The graphical representation of the CAPM is called the _____.

10)

Intro

A stock has a beta of 1.8. The risk-free rate is 4%. Assume that the CAPM holds.

Part 1

What is the expected return for the stock if the expected return on the market is 8%?

Part 2

What is the expected return for the stock if the expected market risk premium is 8%?

11)

Intro

Use the expected return-beta equation from the CAPM.

Part 1

What is the expected return for a stock if the risk-free rate is 2%, beta 0.6 and the expected return for the market portfolio is 6%?

Part 2

What is the risk-free rate if beta is 1.1, the expected return 6.3% and the expected return for the market portfolio is 6%?

Part 3

What is beta if the risk-free rate is 2%, the expected return 12% and the expected return for the market is 6%?

Part 4

What is the expected return for the market if the risk-free rate is 2%, beta 0.6 and the expected return 12%?

12)

Intro

We know the following expected returns for stocks A and B, given different states of the economy:

State (s) Probability E(rA,s) E(rB,s)
Recession 0.3 -0.04 0.04
Normal 0.5 0.11 0.07
Expansion 0.2 0.19 0.11

The expected return on the market portfolio is 0.08 and the risk-free rate is 0.02.

Part 1

What is the standard deviation of returns for stock A?

.

Part 2

What is the standard deviation of returns for stock B?

Part 3

What is the beta for stock A?

Part 4

What is the beta for stock B?

Part 5

Which stock has more total risk?

Part 6

Which stock has more systematic risk?

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