FNCE 2P91 Study Guide - Quiz Guide: Market Risk, Mutual Fund, Capital Asset Pricing Model
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Consider the following two funds and their estimated returns under different states of the economy:
State of economy | Probability | Estimated Return (Fund A) | Estimated Return (Fund B) |
Great | 25% | 10% | 25% |
Average | 30% | 15% | 11% |
Poor | 40% | 20% | 15% |
Calculate the following:
- Expected return for fund A and for fund B
- Standard deviation of returns for fund A and fund B
- Covariance between returns of fund A and fund B
- Correlation between returns of fund A and fund B
If you invest $2,000 in Fund A and $6,000 in Fund B, Calculate the following:
- Portfolios
probability of the state of economic | Rate of return STOCK A | if states STOCK B | occurs STOCK C | |
boom | 0,2 | 0,4 | -0,04 | 0,12 |
good | 0,3 | 0,2 | 0,05 | 0,08 |
poor | 0,4 | 0,04 | 0,1 | 0,02 |
burst | 0,1 | -0,06 | 0,14 | 0 |
a. Calculate the expected return of each stock.
b. Calculate the variance and standard deviation of each stock.
c. Calculate the expected return of the portfolio (Portfolio1) consisting 40% of stock A,
40% of stock B and 20% of stock C.
d. Calculate the variance and standard deviation of this portfolio.
e. Consider an alternative portfolio (Portfolio2) 40% of stock A, 20% of stock B, 10% of
stock C and 30% in the risk-free asset. Risk-free asset expected return is 2%. What is
this portfolioâs expected return, variance and standard deviation?
f. Based on CAPM calculate each stock beta if market risk premium is 5%.
g. Which stock has the lowest systematic risk? Which stock has the lowest total risk?
Which stock is âsafestâ? Explain.
h. What is the beta of the Portfolio1 and Portfolio?
probability of the state of economic | Rate of return STOCK A | if states STOCK B | occurs STOCK C | |
boom | 0,2 | 0,4 | -0,04 | 0,12 |
good | 0,3 | 0,2 | 0,05 | 0,08 |
poor | 0,4 | 0,04 | 0,1 | 0,02 |
burst | 0,1 | -0,06 | 0,14 | 0 |
Calculate the expected return of each stock.
b. Calculate the variance and standard deviation of each stock.
c. Calculate the expected return of the portfolio (Portfolio1) consisting 40% of stock A,
40% of stock B and 20% of stock C.
d. Calculate the variance and standard deviation of this portfolio.
e. Consider an alternative portfolio (Portfolio2) 40% of stock A, 20% of stock B, 10% of
stock C and 30% in the risk-free asset. Risk-free asset expected return is 2%. What is
this portfolioâs expected return, variance and standard deviation?
f. Based on CAPM calculate each stock beta if market risk premium is 5%.
g. Which stock has the lowest systematic risk? Which stock has the lowest total risk?
Which stock is âsafestâ? Explain.
h. What is the beta of the Portfolio1 and Portfolio?