1. Consider the following information on the portfolio of three stocks.
returns
state |
probability |
Stock A |
Stock B |
Stock C |
boom |
10% |
5% |
30% |
50% |
normal |
55% |
10% |
10% |
20% |
bust |
35% |
15% |
-10% |
-25% |
a. Assuming your portfolio is invested 40% in Stock A, 30% in Stock B, and 30% in Stock C., what is the portfolio's expected return? The variance and standard deviation?
b. If the expected T-bill rate is 3%, what is the expected risk premium on the portfolio?
2. You have decided to invest in an equally-weighted portfolio of AT&T, Apple, Proctor & Gamble, and JPM Chase. Using finance.yahoo.com to find the ticker for each company and their betas. Also, use the 13-week T-bill rate for the risk-free rate.
a. Calculate the beta of the portfolio.
b. Using the average large-company stock return from 1960-2017 to estimate the market risk premium, calculate the expected return for each of the four stocks. Also, calculate the expected return for the equally-weighted portfolio.
3. Suppose the expected return on the market is 13% and the risk-free rate is 5%. You own a stock where the expected return is 12% and the stocks beta is 1.25. What do you expect to happen to the price of your stock and why?