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Question

Stuck on a question for my finance assignment, this is what is given.

You have been provided with the following forecasted information for two stocks and the market.
Expected Rate of Return for Stock:

State: Probability: A: B: Market:
Expansion .30 10% 35% 18%
No Change .50 7% 15% 10%
Recession .20 -8% -25% -10%

State: Expansion, No Change, Recession
Probability: 0.3, 0.5, 0.2
Expected Rate of Return for Stock
A: 10%, 7%,-8%
B:35%, 15%, 10%
Market: 18%, 10%, -10%

*Sorry the table wouldn't transfer easy so theres two variations of it*


Additional Information:

ER Stock A = 4.90%
ER Stock B = 13%
ER Market = 8.4%
Beta stock B = 2.119
Standard Deviation Stock A = 6.58%
Standard Deviation Market = 9.83056
Risk Free rate = 2.5%

A.) Calculate the beta for stock A. (4 marks)
B.)Is this stock more or less risky than the market? (1 mark)
C.)Using stock A and B:
i.)create a portfolio that is expected to earn a 10% rate of return. (3 marks).
ii.)What is the beta of this portfolio? (2 marks)

Any help would be greatly appreciated! thank you!

Answer 1

A.)Beta is Covar(Rasset, Rmarket)/Var of Rmarket....(where variance is std dev squared)

For the Covar(Ra,Rm) you have some math to do - you might want to get out your spreadsheet software...

Sum all: probability of the occurence[(Ra if the occurence - E(Ra))(Rmkt if the occurence - E(Rmkt)]

see more about the formula here: http://www.zenwealth.com/BusinessFinanceOnline/RR/Portfolios.html

e.g. for expansion: 0.30[(0.10 - 0.049)(0.18 - 0.084) = 0.00147

do the same for "no change" and for "recession", add together for the total - this is the Covar of Asset A to the Market ...divide this number by Market Variance ..0.0983056^2 = 0.00966 to get the Beta of Stock A.

B.) hint: compare the standard deviations of each to determine which is less risky

C.) set up your equation: 0.10 = 0.049x + 0.13(1-x)...solve for x..that will equal the percentage you should have invested in A, (1 - x) = percentage you should invest in B (percentage will be in decimal form - simple algebra)

D.) Weight the Betas by the percentages you got in C. That will be the portfolio beta.

e.g if weight is 20% in B and 80% in A...PortBeta = 0.20(2.119) + 0.80(BetaA)



Hope this helps. The above link can be helpful if you feel lost. Good luck.

Answer 2

My advice frankly. Drop this stupid *** course and learn how to really invest if you want to make money. First rule, Invest only in what you know (coke, nike, mcdonalds, intel, microsoft, walmart, etc... and forget all that other nonsense some can't invest their own retirement account professor is teaching (for that very reason)). Second rule, learn the basics ONLY and forget all the other wallstreet BS. How to read a portfolio (i.e. calculate p/e ratios, taxable info and look at pending litigation). All the other crap is irrevelant. You can't nor won't control any of that anyway so forget it. NOBODY can see the future but if you simply use common sense you will 90% of the time make money. I have and I didn't even finish community college and I do just fine. Good Luck and believe in yourself.

Answer 3

that's a style of maths question. i can help you and somebody else could supply you the respond yet how will that help you once you have an examination? you may comprehend it first, then be waiting to reply to it your self. Why do i think like i'm dropping my breath!? Ha! Ha! The giggle would be on you once you fail interest interviews or once you get one and could't do the interest!