Finance Management
boyupe
ex-i-qn-risk-return-f13.docx1. 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:
Stock B:
Market:
b) Find the standard deviation of returns for each asset? (15)
Stock A:
Stock B:
Market:
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 =
Comment on mispricing:
A:
B:
