- What is the expected return on a portfolio which comprised of RM 4,000 in stock M and RM 6,000 in stock N if the economy enjoys a boom period?
state of economy | probability of State of Economy | Return if State Occurs | |
| | Stock M | Stock N |
Boom | 10% | 18% | 10% |
Normal | 75% | 7% | 8% |
Recession | 15% | -20% | 6% |
- The rate of return on the common stock of Flora Flowers is expected to be 14% in a boom economy, 8% in a normal economy, and only 2% in recessionary economy. The probabilities of these economic states are 20% for a boom, 70% for a normal economy, and 10% for a recession. What is the variance of a return on the common stock of Flora Flowers?
- Assuming the CAPM or one – factor model holds, what is the cost of equity for a firm if the firm’s equity has a beta of 1.2, the risk – free rate of return is 2%, the expected return on the market is 9%, the the return to the company debt is 7%?
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