Consider the following situation: State of Economy Probability of State of Economy Returns if State Occurs Stock A Stock B Stock...

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Finance

Consider the following situation:
State of Economy
Probability of State of Economy
Returns if State Occurs
Stock A
Stock B
Stock C
Boom
20%
25%
10%
5%
Recession
80%
-30%
5%
10%
The expected return on the marketportfolio is 7% and the US Treasury bill yields 3%. The capitalmarket is currently in equilibrium.
Which stock has the most systematic risk? Provide all the stepsand equations.
Which stock has the most unsystematic risk? Explain why.Provide all the steps and equations.
What is the standard deviation of a portfolio which iscomprised of $8,400 invested in stock A,$3,600 in stock B, and$8,000 in stock C?
If the expected inflation rate is 2.5%, what is theexactexpected real return on the portfolio of part (c)?

Answer & Explanation Solved by verified expert

4.1 Ratings (562 Votes)

Part a Which has the most systematic risk Stock A ERa 02025 0803 019 19 019 003 007 Beta 3142857143 SD 02025 0192 0803 0192 SD 003872 000968 00484 SD 0048412 22 Stock BERb 0201 08005 006 6 006 003 007 beta See Answer

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Transcribed Image Text

Consider the following situation:State of EconomyProbability of State of EconomyReturns if State OccursStock AStock BStock CBoom20%25%10%5%Recession80%-30%5%10%The expected return on the marketportfolio is 7% and the US Treasury bill yields 3%. The capitalmarket is currently in equilibrium.Which stock has the most systematic risk? Provide all the stepsand equations.Which stock has the most unsystematic risk? Explain why.Provide all the steps and equations.What is the standard deviation of a portfolio which iscomprised of $8,400 invested in stock A,$3,600 in stock B, and$8,000 in stock C?If the expected inflation rate is 2.5%, what is theexactexpected real return on the portfolio of part (c)?

State of Economy	Probability of State of Economy	Returns if State Occurs
State of Economy	Probability of State of Economy	Stock A	Stock B	Stock C
Boom	20%	25%	10%	5%
Recession	80%	-30%	5%	10%