a. As the Head of Business Development of Fidelity Venture Capital, a client has presented a...

70.2K

Verified Solution

Question

Finance

a. As the Head of Business Development of Fidelity VentureCapital, a client has presented a business plan that has thefollowing projected returns for your consideration;
Stock A Stock B
State of the Economy Returns / Prob Returns / Prob
Excellent 32% / 0.4 40% / 0.2
Worse -5% / 0.4 8% / 0.3
Normal 21. % / 0.2 25% / 0.5
Required:
i. Calculate the expected return for each stock
ii. Calculate the total risk of the client’s business for eachstock
iii. If your client plans investing equally in each stock, witha correlation coefficient of -0.8, what is the portfolio return andportfolio risk?
iv. If the beta of the client’s business is 0.9 and the riskfree rate is 22%, calculate the required rate of investment if themarket risk premium is 4%.

Answer & Explanation Solved by verified expert

4.1 Ratings (767 Votes)

i Expected Return on Each StockStock A Return Respective ProbabilityStock A 032 040 005 040 021 020Stock A 15Stock B Return Respective See Answer

Get Answers to Unlimited Questions

Join us to gain access to millions of questions and expert answers. Enjoy exclusive benefits tailored just for you!

Membership Benefits:

Unlimited Question Access with detailed Answers
Zin AI - 3 Million Words
10 Dall-E 3 Images
20 Plot Generations
Conversation with Dialogue Memory
No Ads, Ever!
Access to Our Best AI Platform: Flex AI - Your personal assistant for all your inquiries!

Become a Member

Transcribed Image Text

a. As the Head of Business Development of Fidelity VentureCapital, a client has presented a business plan that has thefollowing projected returns for your consideration;Stock A Stock BState of the Economy Returns / Prob Returns / ProbExcellent 32% / 0.4 40% / 0.2Worse -5% / 0.4 8% / 0.3Normal 21. % / 0.2 25% / 0.5Required:i. Calculate the expected return for each stockii. Calculate the total risk of the client’s business for eachstockiii. If your client plans investing equally in each stock, witha correlation coefficient of -0.8, what is the portfolio return andportfolio risk?iv. If the beta of the client’s business is 0.9 and the riskfree rate is 22%, calculate the required rate of investment if themarket risk premium is 4%.