1. Based on historical data, you have estimated the following fortune distributions for the run offs on 2 individual securities (SMALL and BIG) and the value-weighted merchandise portfolio: State hazardSmall macroMarket Expansion0.3025%8%12% Normal0.515%6%10% Recession0.200%2%3% a) Calculate the expected lead and metre deviation of return for Small, gargantuan and the market portfolio b) Calculate the covariance amidst Small and macro; between Small and the market, and between Big and the market. c) Calculate the expected return and quantity deviation of return for a portfolio that consists of ½ Big and ½ Small. d) Calculate the expected return and standard deviation of return for a portfolio that consists of 3/4 Big and 1/4 Small. e) Compare the five investment funds opportunities: the two portfolios in c) and d), the individual securities Small and Big, and the market portfolio. Without performing all calculations, can you recommend buying (or not buying) any of these investments? 2. The investment opportunity set above has been enhanced by the inclusion of a risk-free investment that pays 1%. Does access to this asset change your answer to 1e) above? Feel free to riding habit calculations. 3. What is the genus Beta of Small in the problem above? What is the beta of Big?
If the CAPM is true, is Small in equilibrium, is it undervalued or is it overvalued? What about Big? You may continue to assume that the risk-free rate is 1%. 4. Download the spreadsheet labeled Homework 3 Problem 4 Spreadsheet from the course website. There are three columns of data: a monthly date, a finish price for an individual stock, and the market close. a) Calculate a monthly return series from the closing monthly prices of both the market and the individual security. b) Calculate the arithmetical mean return and the standard deviation of the monthly return for both series. c) Calculate the... If you want to get a near essay, order it on our website: Ordercustompaper.com
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