1 Rate of Return if State Occurs Stock B .20 State of Economy Recession Normal Boom Probability of State of Economy .20

Question

1 Rate of Return if State Occurs Stock B .20 State of Economy Recession Normal Boom Probability of State of Economy .20 .50 .30 Stock A -15 .20 .60 .30 .40 Q1: What are the expected returns and standard deviations for these two stocks? Security Cooley Inc. Moyer Company Beta 1.8 1.6 Expected Retum 22.00% 20.44 Q2: If the risk-free rate is 7 percent, are these securities correctly priced? What would the risk-free rate have to be if they are correctly priced? 2 Suppose you want to be a millionaire in 10 years. How much will you at least have to put aside each year in order to become one? Assume that the interest rate is 5% and your first deposit is at the end of this year.

Help In Homework · Accepted Answer

1 Q1 Stock A Scenario Probability Return% =rate of return% * probability Actual return -expected return(A)% (A)^2* probability Recession 0.5 -15 -7.5 -35.5 0.0630125 Normal 0.5 20 10 -0.5 0.0000125 Boom 0.3 60 18 39.5 0.0468075 Expected return %= sum of weighted return = 20.5 Sum=Variance Stock A= 0.10983 Standard deviation of Stock A% =(Variance)^(1/2) 33.14 Stock B Scenario Probability Return% =rate of return% * probability Actual return -expected return(A)% (B)^2* probability Recession 0.5 20 10 -17 0.01445 Normal 0.5 30 15 -7 0.00245 Boom 0.3 40 12 3 0.00027 Expected return %= sum of weighted return = 37 Sum=Variance Stock B= 0.01717 Standard deviation of Stock B% =(Variance)^(1/2) 13.1 2 Future value of annuity=annuity[(1+rate)^time period-1]/rate 1,000,000=annuity*[(1.05)^10-1]/0.05 1,000,000=annuity*12.57789254 Annuity=1,000,000/12.57789254 =$79504.57(approx)

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1 Rate of Return if State Occurs Stock B

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Archived Solution

Stock A
Scenario	Probability	Return%	=rate of return% * probability	Actual return -expected return(A)%	(A)^2* probability
Recession	0.5	-15	-7.5	-35.5	0.0630125
Normal	0.5	20	10	-0.5	0.0000125
Boom	0.3	60	18	39.5	0.0468075

	Expected return %=	sum of weighted return =	20.5	Sum=Variance Stock A=	0.10983
			Standard deviation of Stock A%	=(Variance)^(1/2)	33.14

Stock B
Scenario	Probability	Return%	=rate of return% * probability	Actual return -expected return(A)%	(B)^2* probability
Recession	0.5	20	10	-17	0.01445
Normal	0.5	30	15	-7	0.00245
Boom	0.3	40	12	3	0.00027

	Expected return %=	sum of weighted return =	37	Sum=Variance Stock B=	0.01717
			Standard deviation of Stock B%	=(Variance)^(1/2)	13.1