Economic state
Probability
T-Bill
Alta Indus.
Repo Men
American Foam
Market Port.(index)
Recession
0.1
8.00%
-22.0%
28.0%
10.0%
-13.0%
Below Average
0.2
8.00%
-2.0%
14.7%
-10.0%
1.0%
Average
0.4
8.00%
20.0%
0.0%
7.0%
15.0%
Above Average
0.2
8.00%
35.0%
-10.0%
45.0%
29.0%
Boom
0.1
8.00%
50.0%
-20.0%
30.0%
43.0
Barney Smith Investment Advisors recently issued estimates forthe state of the economy and the rate of return on each state ofthe economy. Alta Industries, Inc. is an electronics firm; Repo MenInc. collects past due debts; and American Foam manufacturesmattresses and various other foam products. Barney Smith alsomaintains an "index fund" which owns a market-weighted fraction ofall publicly traded stocks; you can invest in that fund and thusobtain average stock market results. Given the situation asdescribed, answer the following questions.
a. Calculate the expected rate of return on eachalternative.
b. Calculate the standard deviation of returns on eachalternative.
c. Calculate the coefficient of variation on eachalternative.
d. Calculate the beta on each alternative.
e. Do the SD, CV, and beta produce the same risk ranking? Why orwhy not?
f. Suppose you create a two-stock portfolio by investing $50,000in Alta Industries and $50,000 in Repo Men. Calculate the expectedreturn, standard deviation, coefficient of variation, and beta forthis portfolio. How does the risk of this two-stock portfoliocompare with the risk of the individual
Economic state | Probability | T-Bill | Alta Indus. | Repo Men | American Foam | Market Port.(index) |
Recession | 0.1 | 8.00% | -22.0% | 28.0% | 10.0% | -13.0% |
Below Average | 0.2 | 8.00% | -2.0% | 14.7% | -10.0% | 1.0% |
Average | 0.4 | 8.00% | 20.0% | 0.0% | 7.0% | 15.0% |
Above Average | 0.2 | 8.00% | 35.0% | -10.0% | 45.0% | 29.0% |
Boom | 0.1 | 8.00% | 50.0% | -20.0% | 30.0% | 43.0 |
Barney Smith Investment Advisors recently issued estimates forthe state of the economy and the rate of return on each state ofthe economy. Alta Industries, Inc. is an electronics firm; Repo MenInc. collects past due debts; and American Foam manufacturesmattresses and various other foam products. Barney Smith alsomaintains an "index fund" which owns a market-weighted fraction ofall publicly traded stocks; you can invest in that fund and thusobtain average stock market results. Given the situation asdescribed, answer the following questions.
a. Calculate the expected rate of return on eachalternative.
b. Calculate the standard deviation of returns on eachalternative.
c. Calculate the coefficient of variation on eachalternative.
d. Calculate the beta on each alternative.
e. Do the SD, CV, and beta produce the same risk ranking? Why orwhy not?
f. Suppose you create a two-stock portfolio by investing $50,000in Alta Industries and $50,000 in Repo Men. Calculate the expectedreturn, standard deviation, coefficient of variation, and beta forthis portfolio. How does the risk of this two-stock portfoliocompare with the risk of the individual
