What is the expected return and standard deviation of a portfolio that is invest

Question

What is the expected return and standard deviation of a portfolio that is invested 50% in Stock A and 50% in Stock B? 113.6% and .8%] Using CAPM. what return should be required for IAA stock. Its beta is 1.20, the risk-free rate (T-bills) is 6% and the rate of return on the market portfolio (S&P; 500) is 20%? [22.8%] and the risk premium is ( ) [16.8%]. IAA stock price was $21 last year and now it becomes S17 per share. The return on Stock IAA is ( ), given that no dividend is distributed. Comparing your answers to (2) and (3), you should (buy or sell) IAA stocks. What is the expected return and standard deviation of a portfolio that is invested 50% in Stock A and 50% in Stock B? [7.5% and 2.60%] Using CAPM, what return should be required for TAT stock. Its beta is 1.30, the risk-free rate (T-bills) is 5% and the rate of return on the market portfolio (S&P; 500) is 22%? [27.1%] Using CAPM, what return should be required for XBAY stock. Its beta is 2.50, the risk-free rate (T-bills) is 4% and the rate of return on the market portfolio (S&P; 500) is 20%? [44%] The beta for T-bills is: .The beta for the stock market as a whole, or an average stock, is: .[0, 1] The return on Stock A is 8% and its standard deviation is 4% and the return on Stock B is 9% and its corresponding standard deviation is 5%. Which stock is

Explanation / Answer

Answer:(1) E(R) stock A=0.80*20%+0.20*6%=17.2%

Stock B=0.80*8%+0.20*18%=10%

Expected return on portfolio=0.50*17.2%+0.5*10%=13.6%

Standard deviation of the portfolio:

Variance of stock A=0.80(20-17.2)2+0.20(6-17.2)2=31.36%

Standard deviation of A=Square root of 31.36%

=5.6%

standard deviation of B=0.80*(8%-10%)2+0.20*(18%-10%)2=16%

=Square root of 16%

=4%

Standard deviation of the portfolio=5.6+4/2=4.8%

Answer:2

Ke=Rf+beta(Erm-Rf)

=6%+1.20(20%-6%)

=22.8%

Rick premium=beta(Erm-Rf)

=1.20(20%-6%)=16.8%

Answer:3Return=Current price-Previous price/PRevious price

=17-21/21=-19.04%

Answer(4) Sell the stock.

Answer:(5) E(R) stock A=0.75*10%+0.25*5%=8.75%

Stock B=0.75*2%+0.25*19%=6.25%

Expected return on portfolio=0.50*8.75%+0.5*6.25%=7.5%

Standard deviation of the portfolio:

Variance of stock A=0.75(10-8.75)2+0.25(5-8.75)2=4.6875%

Standard deviation of A=Square root of 4.6875%

=2.17%

standard deviation of B=0.75*(2%-6.25%)2+0.25*(19%-6.25%)2=54.1875%

=Square root of 54.1875

=7.36%

Standard deviation of the portfolio=2.17+7.36/2=4.7%

Answer:(6) Ke=5%+1.30(22%-5%)

=27.1%

Answer:(7) Ke=4%+2.50(20%-4%)

=44%

Answer:(8) The beta for T-bills is 0.

The beta for avergage stock is 1.

Answer(9) Stock B is higher risky because its SD is higher than stock A.

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