1. A portfolio’s returns are forecasted to have the following distribution: Dema
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Question
1. A portfolio’s returns are forecasted to have the following distribution:
Demand for the Prob of Demand occurring
companys products Rate of return if this demand occurs
Weak 20% -12%
Average 50% 11%
Strong 30% 17%
Calculate the expected return of the portfolio.
2. You have decided to invest $70,000 in Stock Fund, and $30,000 in Bond. The returns for each fund are forecasted below: Fill in the portfolio’s forecasted return for a strong economy and a weak economy. Then calculate the expected return for the portfolio.
Economy (Probalility) Stock Fund Return Bond Fund Return Portfolio Return
Strong (65%) 16% 2% ___________________
Weak (35%) -12% 7% __________________
Expected return portfolio_______________
3. Assume that the risk-free rate is 1.4% and the market risk premium is 7.5%.
What is the required return for a stock that has a beta of .8?
What is the required return for a stock that has a beta of 1.2?
Explanation / Answer
1. A portfolio’s returns are forecasted to have the following distribution:
Demand for the Prob of Demand occurring
companys products Rate of return if this demand occurs
Weak 20% -12%
Average 50% 11%
Strong 30% 17%
Calculate the expected return of the portfolio.
Part 2
You have decided to invest $70,000 in Stock Fund, and $30,000 in Bond. The returns for each fund are forecasted below: Fill in the portfolio’s forecasted return for a strong economy and a weak economy. Then calculate the expected return for the portfolio.
Economy (Probalility) Stock Fund Return Bond Fund Return Portfolio Return
Strong (65%) 16% 2% ___________________
Weak (35%) -12% 7% __________________
Expected return portfolio_______________
3. Assume that the risk-free rate is 1.4% and the market risk premium is 7.5%.
What is the required return for a stock that has a beta of .8?
=Rf+beta*(Rp)
=1.4%+.8(7.55%) =7.44%
What is the required return for a stock that has a beta of 1.2?
=Rf+beta*(Rp)
=1.4%+1.2(7.55%) =10.46%
Weight Return Weight*return Weak 20% -12% -0.024 Average 50% 11% 0.055 Strong 30% 17% 0.051 expected return 8.20%Related Questions
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