Based on the following information Calculate State of...
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Accounting
Based on the following information Calculate
| State of Economy | Probability of State of Economy | Rate of Return if State Occurs | |
| Stock A | Stock B | ||
| Recession | 0.25 | 0.05 | -0.17 |
| Normal | 0.45 | 0.08 | 0.12 |
| Boom | 0.30 | 0.13 | 0.29 |
a) The expected return of Stock A
b) The expected return of Stock B
c) The expected return of Portfolio where you invest $15,000 in Stock A and $25,000 in Stock B
d) Suppose Stock A has a beta of 0.8 and Stock B has a beta of 1.2. If you invest $15,000 in Stock A and $25,000 in Stock B, what is the beta of this portfolio?
e) Expected return on the market (RM ) is 12% and the risk-free (rf) is 3%. What must the expected return on the portfolio according to CAPM? (Use the beta you have calculated in section d) for CAPM)
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