Question

You have done your research for the following investments and your friend has provided their expectations for the markets for next year. Probability of State of State of Stock Stock Economy Economy A B TSX Boom .30 30% -9% 18% Normal .40 16% 12% 10% Recession .30 -10% 20% -10% * Remember to show all of your work * a. Calculate the expected return for stock A. (2 marks) b. Calculate the expected return for stock B. (2 marks) C. Calculate the expected return for the TSX. (2 marks) d. Calculate the risk for stock A. (2 marks) e. Calculate the risk for stock B. (2 marks) f. Calculate the risk for the TSX. (2 marks) g. Calculate the covariance and correlation of the returns for stock A and stock B. (2 marks) h. Calculate the covariance and correlation of the returns for stock A and the TSX. (2 marks) i. Calculate the covariance and correlation of the returns for stock B and the TSX. (2 marks) j. Calculate the beta of Stock A. (2 marks) k. Calculate the beta of stock B. (2 marks) I. Calculate the beta for the TSX. (2 marks) m. Using an excel spreadsheet and the calculations you have done above, prepare a spreadsheet that provides the expected returns and the risk for a portfolio that invests in stock A and stock B. Prepare the calculations using 4% increments in the weights. (10 marks)

Answer 1

Detailed answer is provided in the hand written notes below.

Answer to Question State Stock TSX Stock А af Probability Economy P(A) P(B) P(Tsx) (A- P(A-A) 2 92-928- 17-64. 18-1 30/ 30 -9.4. Boom Normal Revession 5-1844-2 40 124 104 4). 3-6). 1601 - 10% aal. -2.7%. 5.44 6-07 4-87. -3% 6). -30% 12-49-18) 8-10) 6.444 (TS) 2 .30 201. -104 --22.44 150 -528 4- 248.64 4.2 (a) expected return of stock A le à SPCA) 12-4) Expected retorn of stock Bite o EP (B) 8.1. Expected return of tsx te Tsx EP(Tsx) 6-4 (d) Risk af stock A mean Standard deviation of stock A vananue EP (A-A) ² 248.64.2 15-7683/