FIN- Correlation Related Multiple Problems
| Q1Based on the following information: |
| State of Economy | Probability of State of Economy |
Rate of Return if State Occurs |
| Depression | .12 | −.103 |
| Recession | .23 | .061 |
| Normal | .47 | .132 |
| Boom | .18 | .213 |
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| Calculate the expected return. (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16)) |
| Expected return | [removed] % |
| Calculate the standard deviation. (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16)) |
| Standard deviation | [removed] % |
| Q2.Consider the following information: |
| Rate of Return if State Occurs | ||||||||||||
| State of | Probability of |
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| Economy | State of Economy | Stock A | Stock B | Stock C | ||||||||
| Boom | .15 | .37 | .47 | .27 | ||||||||
| Good | .45 | .22 | .18 | .11 | ||||||||
| Poor | .35 | − | .04 | − | .07 | − | .05 | |||||
| Bust | .05 | − | .18 | − | .22 | − | .08 | |||||
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| a. | Your portfolio is invested 20 percent each in A and C, and 60 percent in B. What is the expected return of the portfolio? (Do not round intermediate calculations and round your answer to 2 decimal places. (e.g., 32.16)) |
| Expected return | [removed] % |
| b–1. | What is the variance of this portfolio? (Do not round intermediate calculations and round your answer to 5 decimal places. (e.g., 32.16161)) |
| Variance | [removed] |
| b–2. | What is the standard deviation? (Do not round intermediate calculations and round your answer to 2 decimal places. (e.g., 32.16)) |
| Standard deviation | [removed] % |
Q3.Stock Y has a beta of 1.8 and an expected return of 18.2 percent. Stock Z has a beta of 0.8 and an expected return of 9.6 percent. If the risk-free rate is 5.2 percent and the market risk premium is 6.7 percent, the reward-to-risk ratios for stocks Y and Z are [removed] and [removed] percent, respectively. Since the SML reward-to-risk is [removed] percent
| Q4. Based on the following information: |
| State of Economy |
Return on Stock A |
Return on Stock B |
| Bear | .107 | −.050 |
| Normal | .110 | .153 |
| Bull | .078 | .238 |
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| Assume each state of the economy is equally likely to happen. |
| Calculate the expected return of each of the following stocks. (Do not round intermediate calculations and round your final answers to 2 decimal places. (e.g., 32.16)) |
| Expected return | |
| Stock A | [removed]% |
| Stock B | [removed]% |
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| Calculate the standard deviation of each of the following stocks. (Do not round intermediate calculations and round your final answers to 2 decimal places. (e.g., 32.16)) |
| Standard deviation | |
| Stock A | [removed]% |
| Stock B | [removed]% |
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| What is the covariance between the returns of the two stocks? (Negative amount should be indicated by a minus sign, Do not round intermediate calculation and round your final answer to 6 decimal places. (e.g., 32.161616)) |
| Covariance | [removed] |
| What is the correlation between the returns of the two stocks? (Negative amount should be indicated by a minus sign, Do not round intermediate calculation round your final answer to 4 decimal places. (e.g., 32.1616)) |
| Correlation | [removed] |
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