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Question:Risk and Return
1.Consider the following scenario analysis for Stocks A and B and for the market portfolio (M)
Rate of Return |
|||||
State of Economy |
Probability of State |
Stock A % |
Stock B % |
Market % |
|
|
|
|
|
|
|
Boom |
0.1 |
30 |
45 |
33 |
|
Good |
0.6 |
12 |
10 |
15 |
|
Average |
0.2 |
1 |
-15 |
-5 |
|
Bust |
0.1 |
-20 |
-30 |
-9 |
a) Calculate the expected rate of return on each stock and the market? (15)
Stock A:
Expected Rate = = 30*0.1+12*0.6+1*0.2-20*0.1
= 8.4%
Stock B:
Expected Rate = = 45*0.1+10*0.6-15*0.2-30*0.1
= 4.5%
Market:
Expected Rate = = 33*0.1+15*0.6-5*0.2-9*0.1
= 10.4%
b) Find the standard deviation of returns for each asset? (15)
Stock A:
Standard deviation =
= 208.2
Stock B:
Standard deviation =
= 393
Market:
Standard deviation =
= 246.6
2. The risk free rate is 3% and the betas of the stocks are:
Stock Beta
A 1.20
B 0.70
Are the stocks fairly priced?
Find required returns:
A:
B:
Find alphas:
A: Alpha =
B: Alpha =
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