Finance

A. The Wildcat Company faces the following probability distribution:

Calculate the stock’s expected return.

Use the table below or your own spreadsheet to input your calculations.

State ofThe Economy | Probability | Estimated Return | Piri | | | |

Boom | 0.45 | 55% | 24.75% | | | |

Normal | 0.35 | 25% | 8.75% | | | |

Recession | 0.20 | 5% | 1.0% | | | |

| | | 34.5% | | | |

| | | | | | |

B. Ripken Iron Works faces the following probability distribution:

Ripken’s Expect Rate of Return is 17%. You do not have to recalculate Expected Return!!!

Calculate the stock’s standard deviation. (7 points)

Use the table below or your own spreadsheet to input your calculations.

State ofThe Economy | ProbabilityPi | EstimatedReturnri | | | | |

Boom | 0.35 | 35% | 18% | 324 | 113.40 | |

Normal | 0.45 | 15% | -2% | 4 | 1.8 | |

Recession | 0.20 | -10% | -27% | 729 | 145.80 | |

| | | |  | 261 | |

| | | |  | 16.155% | |

C. Given the following probabilities for the states of the economy and Estimated Returns calculate the standard deviation of the returns for a portfolio consisting of 60% of Firm A and 40% of Firm B. The expected rate of return on the portfolio is 8.36%.

The expected return on portfolio = 8.36%

Therefore, the expected return (rA) on A which comprises 60% = 5.01600%

And the expected return (rB) on B which comprises 40% = 3.344 %

State | Prob (Pi) | EstimatedReturnCompany A(ri) | ri - r | (ri – r)2 | (ri – r)2 Pi | | |

Strong | 0.30 | 12% | 6.984% | 48.77626 | 14.632 | | |

Normal | 0.40 | 8% | 2.984% | 8.90426 | 3.56170 | | |

Weak | 0.30 | 6% | 0.984% | 0.96826 | 0.29048 | | |

| | | | σ2 = | 18.48498 | | |

| | | | σ = | 4.299% | | |

The standard deviation of Company A = 4.299%

State | Prob (Pi) | EstimatedReturnCompany B(ri) | ri - r | (ri – r)2 | (ri – r)2 Pi | | |

Strong | 0.30 | 25% | 21.656% | 468.98 | 140.69 | | |

Normal...