Consider stock X, with the following annual return distribution: if the economy

Question

Consider stock X, with the following annual return distribution: if the economy is in a boom the stock has a return of 18%, if the economy is in a normal state the stock has a return of 12% and if the economy is in a recession the stock has a return of -5%. For next year, you estimate that the probability of a boom is 30%, the probability of normal times is 50% and the probability of a recession is 20%.
Calculate: i. the expected return of stock X, ii. the standard deviation of the return of stock X, iii. the expected value and the standard deviation of the surprise component of the stock X return. iv. In which state(s) will the realized stock return exceed the expected stock return? v. If the 1-year Treasury Bill rate is 3%, what is the risk premium of stock X? vi. If there is a boom, what will be its realized excess return
Consider stock X, with the following annual return distribution: if the economy is in a boom the stock has a return of 18%, if the economy is in a normal state the stock has a return of 12% and if the economy is in a recession the stock has a return of -5%. For next year, you estimate that the probability of a boom is 30%, the probability of normal times is 50% and the probability of a recession is 20%.
Calculate: i. the expected return of stock X, ii. the standard deviation of the return of stock X, iii. the expected value and the standard deviation of the surprise component of the stock X return. iv. In which state(s) will the realized stock return exceed the expected stock return? v. If the 1-year Treasury Bill rate is 3%, what is the risk premium of stock X? vi. If there is a boom, what will be its realized excess return
Consider stock X, with the following annual return distribution: if the economy is in a boom the stock has a return of 18%, if the economy is in a normal state the stock has a return of 12% and if the economy is in a recession the stock has a return of -5%. For next year, you estimate that the probability of a boom is 30%, the probability of normal times is 50% and the probability of a recession is 20%.
Calculate: i. the expected return of stock X, ii. the standard deviation of the return of stock X, iii. the expected value and the standard deviation of the surprise component of the stock X return. iv. In which state(s) will the realized stock return exceed the expected stock return? v. If the 1-year Treasury Bill rate is 3%, what is the risk premium of stock X? vi. If there is a boom, what will be its realized excess return

Explanation / Answer

i. The expected return of stock X is 0.104 or 10.4%

ii. the standard deviation of the return of stock X 0.01742 or 1.742%

iii. the expected value and the standard deviation of the surprise component of the stock X return.

The expected return of the surprise component is 0.06 for normal period and the least deviation in the period of recession.

iv. In which state(s) will the realized stock return exceed the expected stock return

Relevant information is not provided to answer this question

stage annual return-A Chances for the next year-P A*P A*A*P boom 18% 0.30 0.054 0.00972 normal 12% 0.50 0.06 0.0072 recession -5% 0.20 -0.01 0.0005 Sum 0.104 0.01742

Related Questions

Navigate

• Browse (All)
• Browse C
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.