Betai Variance R) Variance(Ru) Where: Rand Rw are the rates of return on securit

Question

Betai Variance R) Variance(Ru) Where: Rand Rw are the rates of return on security i (A,B,C,D; one at a time) and the market (M), respectively. Given the probability distribution of LMH stock's return and the Market's (M) rates of return Growth of Economy: Probability: LMH Rate of Return: Market Rate ofRetum: Slow 0.3 8% 3% 0.5 12% 6% 0.2 16% 9% 3. Find the expected (mean or average) rate of return for stock LMH and the Market (M) 4. Find the variance and standard deviation of return for stock LMH and the Market (M 5. Find the beta for LMH stock (see the formula for the beta given above).

Explanation / Answer

a. Expected return on LMH= 11.6%

Expected return on market = 5.7%

b. Variance = 7.84

SD =sqrt(7.84) = 2.8

c. Covariance = 5.88

Beta =Covariance/ Variance of Market = 5.88/ 4.41

= 1.33

Covariance is computed as below

Market variance is computed below

Slow Average Fast Probability 0.3 0.5 0.2 LMH Return 8% 12% 16% P*Return 0.024 0.06 0.032 Expected return 11.60% Market return 3% 6% 9% P*Return 0.009 0.03 0.018 Expected return 5.70%

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