Speculative, or non-investment-grade, bonds have an S&P bond rating of Select on

Question

Speculative, or non-investment-grade, bonds have an S&P bond rating of

Select one:

a. BBB or less.

b. CCC or less.

c. C or less.

d. BB or less.

Stock A has the following returns for various states of the economy:

State of
the Economy Probability Stock A's Return
Recession 10% -30%
Below Average 20% -2%
Average 40% 10%
Above Average 20% 18%
Boom 10% 40%

Stock A's expected return is

Select one:

a. 8.2%.

b. 7.2%.

c. 9.6%

d. 5.4%.

Stock W has the following returns for various states of the economy:

State of the Economy Probability Stock W's Return
Recession 10% -30%
Below Average 20% -2%
Average 40% 10%
Above Average 20% 18%
Boom 10% 40%

Stock W's standard deviation of returns is

Select one:

a. 14%.

b. 20%

c. 17%.

d. 10%.

Explanation / Answer

Answer d. BB or less

Speculative or non-investment grade bonds have a S&P rating of BB or less

Answer a. 82%

Stock A Expected return = 0.1 * -0.30 + 0.20 * -0.02 + 0.4 * 0.10 + 0.20 * 0.18 + 0.10*0.40

                               = -0.03 -0.004 +0.04+0.036 +0.04

                               = 0.082 or 8.20%

Stock W

Answer c. 17%

Expected return = 0.1 * -0.30 + 0.20 * -0.02 + 0.4 * 0.10 + 0.20 * 0.18 + 0.10*0.40

                               = -0.03 -0.004 +0.04+0.036 +0.04

                               = 0.082 or 8.20%

Variance = 0.10 * (-0.30-0.082)^2 + 0.20 * (-0.02-0.082)^2 + 0.40 * (0.10-0.082)^2 + 0.20 *( 0.18-0.082)^2 + 0.10 *(0.40-0.082)^2

= 0.10 * (-0.382)^2+ 0.20 * (-0.102)^2+ 0.4 * 0.018^2 + 0.20 * 0.098^2 + 0.10 * 0.318^2

= 0.10 * 0.145924 + 0.20 *0.010404 + 0.40 * 0.000324 + 0.20 *0.009604 + 0.10 * 0.101124

= 0.0145924 +0.0020808 + 0.0001296 + 0.0019208 + 0.0101124

= 0.028836

Standard Deviation = Square Root (0.028836) = 0.169812 or 17% (rounded off)

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