Finance Questions
1. Calculate the return and standard deviation for the following stock, in an economy with five possible states. If a Boom (Probability=25%) economy occurs, then the expected return is 50%. If a Good (Probability=25%) economy occurs, then the expected return is 25%. If a Normal (Probability=20%) economy occurs, then the expected return is 15%. If a Bad (Probability=20%) economy occurs, then the expected return is 0%. If a Recession (Probability=10%) economy occurs, then the expected return is -18%. Show your work.
2. You are an investor in common stock, and you currently hold a well-diversified portfolio which has an expected return of 10 percent, a beta of 1.2, and a total value of $ 14 ,000. You plan to increase your portfolio by buying 100 shares of AT&E at $ 33 a share. AT&E has an expected return of 11 percent with a beta of 1.7. What will be the expected return of your portfolio after you purchase the new stock? Enter your answer to the nearest .1%.Show your answer as a whole number, thus 12.4% would be 12.4 rather than .124. Show your work.
3. Calculate the required rate of return for Mercury Inc. to the nearest .1 Assume that investors expect a 4.0 percent rate of inflation in the future. The real risk-free rate is equal to 1.6 percent and the market risk premium is 8.9 percent. Mercury has a beta of 0.7 , and its realized rate of return has averaged 14.5 percent over the last 5 years. Show your work.
