Problem # 1

1. Expected Returns - Use the following information on states of the economy and stock returns to calculate the expected return for Ford Motors:

2. Standard Deviations- Using the information in the previous question, calculate the standard deviation of returns.

3. Expected Returns and Deviations - Repeat Questions 1 and 2 assuming that all three states are equally likely.

State of Economy |
Probability of State of the Economy |
Security Return if State Occurs |

Recession |
.30 |
-8% |

Normal |
.40 |
13 |

Boom |
.30 |
23 |

Problem # 2

A stock has a beta of .9 and an expected return of 9 percent. A risk-free asset currently earns 4 percent.

a. What is the expected return on a portfolio that is equally invested in the two assets?

b. If a portfolio of the two assets has a beta of .5, what are the portfolio weights?

c. If a portfolio of the two assets has an expected return of 8 percent, what is its beta?

d. If a portfolio of the two assets has a beta of 1.80, what are the portfolio weights? How do you interpret the weights for the two assets in this case? Explain.

Subject | Mathematics |

Due By (Pacific Time) | 12/10/2014 12:00 am |

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