5. Given the following probability distributions for Stock A and the market port
ID: 2735285 • Letter: 5
Question
5. Given the following probability distributions for Stock A and the market portfolio, M: State Probability of Occurrence Return on Stock A Return on Market, M Depression 0.15 -50% -30% Bust 0.30 -15% -8% Boom 0.55 30% 18% (
a) Compute the expected rate of return, standard deviation, and beta of Stock A, given that the expected rate of return and the standard deviation of the market portfolio, M, are, respectively, 0.03 and 0.1798.
(b) Now, you construct a 2-stock portfolio by investing $400,000 in Stock A and $200,000 in the market portfolio M, respectively. Compute the required (CAPM) and expected rates of return on the 2-stock portfolio, respectively, given that the risk-free rate and the inflation rate are, respectively, 0.01 and 0.02. Explain your investment recommendation on the 2-stock portfolio according to the CAPM analysis.
Explanation / Answer
a)
Working:
Expected return on Stock = 4.50% Standard deviation = 30.29Related Questions
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