5. After a Fundamental Analysis, a portfolio manager identifies two shares for inclusion into one of his portfolios. He observes four possible states of the Nigerian economy, each with its own probability of occurrence. He also estimated the expected return of the two securities under the four possible states of the economy. State of Economy | Probability | Return: Share A | Return: share B Recession | 0.10 | -25% | 6% Slow Growth | 0.20 | -18% | 4% Normal Growth | 0.30 | 9% | 1% Economic Growth | 0.40 | 30% | -3% Given the information above, calculate a. Expected individual return of both shares. (5 marks) b. Expected individual risk of both shares. (5 marks)
Added by John A.
Close
Step 1
Expected individual return of both shares: To calculate the expected return of each share, we need to multiply the return of each share in each state of the economy by the probability of that state occurring, and then sum up the results. Expected return of Share Show more…
Show all steps
Your feedback will help us improve your experience
Aishwarya Krishnakumar and 92 other Probability educators are ready to help you.
Ask a new question
Labs
Want to see this concept in action?
Explore this concept interactively to see how it behaves as you change inputs.
Recommended Videos
An analyst has predicted the following returns for Stocks A and B in three possible states of the economy: State Probability A B Boom 0.3 0.15 0.25 Normal 0.5 0.10 0.20 Recession ? 0.02 0.01 a. What is the probability of a recession? (Round your answer to 2 decimal places.) Probability b. Calculate the expected return of Stocks A and B. (Round your answers to 1 decimal place.) Expected Return Stocks A % Stocks B % c. Calculate the expected return of a portfolio that is invested 55% in A and 45% in B. (Round your answer to 2 decimal places.) Expected return %
Ahmet Y.
Suppose you observe the following situation: Rate of Return If State Occurs State of Probability of Economy State Stock A Stock B Bust .20 −.06 −.04 Normal .60 .15 .15 Boom .20 .50 .30 a. Calculate the expected return on each stock. (Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places, e.g., 32.16.) Expected return Stock A % Stock B % b. Assuming the capital asset pricing model holds and Stock A's beta is greater than Stock B's beta by .47, what is the expected market risk premium? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) Expected market risk premium
Adi S.
An analyst has predicted the following returns for Stock A and Stock B in three possible states of the economy. State Probability A B Boom 0.25 0.24 0.27 Normal 0.49 0.16 0.20 Recession ? 0.10 0.17 a. What is the probability of a recession? (Round your answer to 2 decimal places.) b. Calculate the expected return for Stock A and Stock B. (Round your answers to 2 decimal places.) c. Calculate the expected return for a portfolio that is invested 42% in A and 58% in B. (Round your answer to 2 decimal places.)
Madhur L.
Recommended Textbooks
Probability with Applications in Engineering, Science, and Technology
Probability and Statistics for Engineers and Scientists
Applied Statistics and Probability for Engineers
Transcript
Watch the video solution with this free unlock.
EMAIL
PASSWORD