Ques. 1) The expected return for Stock Z is 30 percent. If we know the following

Question

Ques. 1)

The expected return for Stock Z is 30 percent. If we know the following information about Stock Z:

Return Probability
Poor 0.2 0.25
Lukewarm ? 0.5
Dynamite! 0.4 0.25
What return will stock Z produce in the Lukewarm state of the world?


Ques. 2)

John is investing in the S&P 500. His expected return on the S&P 500 is 10% with a standard deviation of 4%. If John is investing $200,000, then what is the dollar range of returns that John can have with 90 percent confidence at the end of the year?


Ques. 3)

Microsoft’s beta is 1. The risk free rate of return is 2%. If the expected return on the market is 12 percent, then the expected return on Microsoft is:

Explanation / Answer

1) .30 = 0.2 *.25 + x*.5 +.4*.25 .5x= .15 x= .3 30% 2) .10 +/- 1.645 * .04= 0.0342 to 0.1658 $206,840 to $233,160 3) Re= Rf + B (Rm-Re) Re= 2+ 1(12-2)= 12 percent

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