1. If the economy booms, RTF, Inc. stock is expected to return 13 percent. If th
ID: 2654262 • Letter: 1
Question
1.
If the economy booms, RTF, Inc. stock is expected to return 13 percent. If the economy goes into a recessionary period, then RTF is expected to only return 3 percent. The probability of a boom is 81 percent while the probability of a recession is 19 percent. What is the variance of the returns on RTF, Inc. stock?
a. .001539
b. .001247
c. .000954
d. .055500
e. .039230
2. You own the following portfolio of stocks. What is the portfolio weight of stock C?
a. 35.86 percent
b. 24.69 percent
c. 64.14 percent
d. 32.28 percent
e. 56.97 percent
3
a. 14.20 percent
b. 21.82 percent
c. 23.80 percent
d. 28.40 percent
e. 10.91 percent
If the economy booms, RTF, Inc. stock is expected to return 13 percent. If the economy goes into a recessionary period, then RTF is expected to only return 3 percent. The probability of a boom is 81 percent while the probability of a recession is 19 percent. What is the variance of the returns on RTF, Inc. stock?
Explanation / Answer
1) Calculation of expected return
= Return in boom condition * Probability of boom + Return in recession condition * Probability of recession
= 13%* 0.81+3%*0.19
= 10.53+0.57 i.e 11.07
Deviation in boom = 11.07-13 i.e -1.93
Deviation in recession = 11.07-3 i.e 8.07
Devaition in boom^2 = 3.7249
Deviation in recession ^2 = 65.1249
2) Portfolio weight of stock C = Investment in stock C / Total Investment
= 400*60/(120*40+600*36+400*60+280*59)
= 24000/( 4800+21600+24000+16520)
= 24000/66920
= 35.86 percent
3) Expected rate of return = Risk free return + Beta * Market risk premium
= 4.6%+1.7*14
= 28.40 percent
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.