Using the information in the table answer the following questions.
Scenario
Probability
Stock A
Stock B
Bust
0.4
-5%
1 %
Normal
0.4
15 %
8
Boom
0.2
32 %
20%
a) Find the expected return on stock A
5 points
QUESTION 2
Using the information in the table answer the following questions.
Scenario
Probability
Stock A
Stock B
Bust
0.4
-5%
1 %
Normal
0.4
15 %
8
Boom
0.2
32 %
20%
a) Find the expected return on stock B
5 points
QUESTION 3
Using the information in the table answer the following questions.
Scenario
Probability
Stock A
Stock B
Bust
0.4
-5%
1 %
Normal
0.4
15 %
8
Boom
0.2
32 %
20%
If the T-bill rate is 2 percent and market risk premium is 6 percent, what does CAPM say about the fair expected rate of return on stock A? Assume that the beta of A is 1.5, and beta of B is 1.1.
5 points
QUESTION 4
Using the information in the table answer the following questions.
Scenario
Probability
Stock A
Stock B
Bust
0.4
-5%
1 %
Normal
0.4
15 %
8
Boom
0.2
32 %
20%
If the T-bill rate is 2 percent and market risk premium is 6 percent, what does CAPM say about the fair expected rate of return on Stock B? Assume that the beta of A is 1.5, and beta of B is 1.1.
5 points
QUESTION 5
Which stock is a better buy based on your results so far?
A.
Stock A
B.
Stock B
C.
Both A and B
D.
None of these two stocks
5 points
QUESTION 6
Suppose that the market can be described by the following three sources of systematic risk with associated risk premiums.
Factor
Risk Premium
Industrial production(I)
6 %
Interest rates (R)
3
Consumer confidence(C)
5
The return on a particular stock is generated according to the following equation:
r= 12 % +0.6 I +0.4R+0.8C +e
Find the equilibrium rate of return on this stock using APT. Assume that the risk-free rate of return is 3 percent.
5 points
QUESTION 7
Suppose that the market can be described by the following three sources of systematic risk with associated risk premiums.
Factor
Risk Premium
Industrial production(I)
6 %
Interest rates (R)
3
Consumer confidence(C)
5
The return on a particular stock is generated according to the following equation:
r= 12 % +0.6 I +0.4R+0.8C +e
If The t-bill rate is 3 %. Is the stock over-or underpriced?
5 points
QUESTION 8
Suppose that the market can be described by the following three sources of systematic risk with associated risk premiums.
Factor
Risk Premium
Industrial production(I)
6 %
Interest rates (R)
3
Consumer confidence(C)
5
The return on a particular stock is generated according to the following equation:
r= 12 % +0.6 I +0.4R+0.8C +e
If the t-bill rate is 3 %, calculate alpha.
5 points
QUESTION 9
The returns of market portfolio and stock A under three equally likely scenarios are given in the table. Calculate the beta for stock A.
Scenario
Market
Stock A
Bust
-5%
-10 %
Normal
15 %
15%
Boom
20 %
40%
10 points
QUESTION 10
The returns of market portfolio and stock A under three equally likely scenarios are given in the table. If the risk-free interest rate is 5 percent what is the required rate of return on this stock?
Scenario
Market
Stock A
Bust
-5%
-10 %
Normal
15 %
15%
Boom
20 %
40%
5 points
QUESTION 11
The returns of market portfolio and stock A under three equally likely scenarios are given in the table. If the risk free interest rate is 5 percent, and the current market value of this stock is $48, What is the fair value of the stock? Assume that the stock is expected to pay $0.2 dividends and the end of year price of the stock is expected to be $55.
Scenario
Market
Stock A
Bust
-5%
-10 %
Normal
15 %
15%
Boom
20 %
40%
5 points
QUESTION 12
Using the information in the table calculate information ratio. Assume that the idiosyncratic risk for stock A is 8.25 percent.
Average return
Beta
Standard deviation
Stock A
14.5 %
1.15
30 %
Market
11.8 %
1
20 %
Treasury Bills
4.8 %
0
0
5 points
QUESTION 13
Using the information in the table calculate Sharpe ratio for the stock A.
Average return
Beta
Standard deviation
Stock A
14.5 %
1.15
30 %
Market
11.8 %
1
20 %
Treasury Bills
4.8 %
0
0
5 points
QUESTION 14
Using the information in the table calculate Sharpe ratio for the market.
Average return
Beta
Standard deviation
Stock A
14.5 %
1.15
30 %
Market
11.8 %
1
20 %
Treasury Bills
4.8 %
0
0
5 points
QUESTION 15
Using the information in the table calculate Treynor ratios for both the market and A and submit your answer for stock A
Average return
Beta
Standard deviation
Stock A
14.5 %
1.15
30 %
Market
11.8 %
1
20 %
Treasury Bills
4.8 %
0
0
5 points
QUESTION 16
Using the information in the table calculate Jensen’s measure of alpha for stock A.
Average return
Beta
Standard deviation
Stock A
14.5 %
1.15
30 %
Market
11.8 %
1
20 %
Treasury Bills
4.8 %
0
0
5 points
QUESTION 17
Using the information in the table calculate M-square
Average return
Beta
Standard deviation
Stock A
14.5 %
1.15
30 %
Market
11.8 %
1
20 %
Treasury Bills
4.8 %
0
0
5 points
QUESTION 18
Using the information in the table calculate T-square for the stock.
Average return
Beta
Standard deviation
Stock A
14.5 %
1.15
30 %
Market
11.8 %
1
20 %
Treasury Bills
4.8 %
0
0
5 points
QUESTION 19
Using the information in the table decide whether this stock is a good investment compared to a market portfolio. For which type of investors the stock could be a good investment? Which of the following statements are true?
Average return
Beta
Standard deviation
Stock A
14.5 %
1.15
30 %
Market
11.8 %
1
20 %
Treasury Bills
4.8 %
0
0
A.
If the individual has a diversified portfolio already, this stock is better than the market portfolio
B.
If individual wants to hold this stock alone, then the market portfolio is a better choice
C.
Whether the individual has a diversified portfolio or undiversified portfolio, this stock is better than the market portfolio.
D.
Both statements A and B above is correct.
5 points