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Your portfolio is comprised of $20,000 in Cyclone Inc. and $30,000 in Blooper Corp. State of...

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Finance

Your portfolio is comprised of $20,000 in Cyclone Inc. and$30,000 in Blooper Corp. State of Economy Probability of State ofEconomy Returns if State Occurs Cyclone Blooper Boom 15% 18% 12%Normal 85% 7% 6% 1. What is the expected return and standarddeviation of return for Cyclone? 2. What is the expected return forthe portfolio in a Boom? 3. What is the expected return andstandard deviation of return for the portfolio? (Hint: Find theportfolio return in each state first, then use the probabilities inthe same manner as for a single stock. You don’t need thecorrelation coefficient when using this method.) 4. Your portfoliois comprised of 30 percent of stock AA, 50 percent of stock BB, and20 percent of stock CC. Stock AA has a beta of 0.64, stock BB has abeta of 1.48 and stock CC has a beta of 1.04. What is the beta ofyour portfolio? 5. Which one of the following stocks is correctlypriced if the risk-free rate of return is 2.5 percent and themarket risk premium is 8 percent?

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4.1 Ratings (797 Votes)

Calculation of Expected Return of Cyclon:

State Return % Probability Expected Ret.(Ret.*Prob.)
Boom 18 0.15 2.7
Normal 7 0.85 5.95
Expected return of Cyclon 8.65

Calculation of Standard Deviation of Cyclon:

State Return % Expected Ret. Deviation(Ret.-Exp Ret.) Deviation2
Boom 18 2.7 15.3 234.09
Normal 7 5.95 1.05 1.1025
Total of Deviation2 235.1925
S.D.(=√Total of Deviation2) 15.335987

Calculation of Portfolio Return in Boom:

Boom (Prob 15%)
Company Return % Weight Weighted Return
Cyclone 18 0.4 7.2
Blooper 12 0.6 7.2
Portfolio Return 14.4

Calculation of Portfolio Return in Normal:

Normal(Prob 85%)
Company Return % Weight Weighted Return
Cyclone 7 0.4 2.8
Blooper 6 0.6 3.6
Portfolio Return 6.4

Calculation of Expected return of Portfolio:

State Portfolio Return % Probability Expected Ret.(Ret.*Prob.)
Boom 14.4 0.15 2.16
Normal 6.4 0.85 5.44
Expected Portfolio return 7.6

Calculation of Standard Deviation of returns of Portfolio:

State Portfolio Return % Expected Ret. Deviation(Ret.-Exp Ret.) Deviation2
Boom 14.4 7.6 6.8 46.24
Normal 6.4 7.6 -1.2 1.44
Total of Deviation2 47.68
S.D.(=√Total of Deviation2) 6.9050706

Calculatin of Portfolio Beta:

Stock Beta Weight Product(Beta*Weight)
AA 0.64 0.3 0.192
BB 1.48 0.5 0.74
CC 1.04 0.2 0.208
Portfolio Beta 1.14

Calculation of Expected return Rj (CAPM Return).:

Rj=Risk Free ret(Rf) + Beta(Risk Premium)

Rj(AA)=2.5+.64(8)

=2.5+5.12

=7.62

Rj(BB)=2.5+1.48(8)

=2.5+11.84

=14.34

Rj(CC)=2.5+1.04(8)

=2.5+8.32

=10.82
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