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Use the following information on states of the economy

stock returns to calculate the expected return for Dingaling Telephone: (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places. Omit the “%” sign in your response.)

State of Economy Probability of Security Return

State of Economy If State Occurs

Recession .45 –7.50%

Normal .15 16

Boom .40 20

Expected return %

Sheet2

Problem 11-2

Use the following information on states of the economy and stock returns to calculate the standard deviation of returns. (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places. Omit the “%” sign in your response.)

State of Economy Probability of Security Return

State of Economy If State Occurs

Recession .40 –6%

Normal .25 10

Boom .35 19

Standard deviation %

Sheet3

Problem 11-3

Use the following information on states of the economy and stock returns to calculate the standard deviation of returns. Assuming that all three states are equally likely. (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places. Omit the “%” sign in your response.)

State of Security Return

Economy If State Occurs

Recession –7.5%

Normal 16

Boom 20

Standard deviation %

Sheet4

Problem 11-4

Security Returns If State Occurs

State of Probability of

Economy State of Economy Roll Ross

Bust 0.2 -13 % 17 %

Boom 0.8 24 6

Calculate the expected returns for Roll and Ross by filling in the following table (verify your answer by expressing returns as percentages as well as decimals): (Negative values should be indicated by a minus sign. Do not round intermediate calculations. Round your E(R) answers to 2 decimal places and your Product answers to 4 decimal places. Omit the “%” sign in your response.)

Roll Ross

State of Economy Probability of Return If Product Return if Product

State of Economy State Occurs State Occurs

Bust 0.2 % %

Boom 0.8 % %

E(R) = % E(R) = %

Sheet5

Problem 11-6

Security Returns

If State Occurs

State of Probability of

Economy State of Economy Roll Ross

Bust 0.6 -14 % 15 %

Boom 0.4 32 5

Calculate the expected return on a portfolio of 30 percent Roll and 70 percent Ross by filling in the following table: (Negative values should be indicated by a minus sign. Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places. Omit the “%” sign in your response.)

State of Probability of Portfolio Return Product

Economy State of Economy If State Occurs

Bust .60 % %

Boom .40 % %

E(RP) = %

Sheet6

Problem 11-8

Consider the following information:

Rate of Return If State Occurs

State of Probability of

Economy State of Economy Stock A Stock B

Recession 0.25 0.05 –.11

Normal 0.55 0.12 0.16

Boom 0.2 0.16 0.36

a. Calculate the expected return for the two stocks. (Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places. Omit the “%” sign in your response.)

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