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Q7C.

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Essentials Of Investments
Found in: Page 145
Essentials Of Investments

Essentials Of Investments

Book edition 9th
Author(s) Zvi Bodie, Alex Kane, Alan Marcus, Alan J. Marcus
Pages 748 pages
ISBN 9780078034695

Short Answer

Use the following scenario analysis for stocks X and Y to answer CFA Questions

Question: What are the expected returns for stocks X and Y?

The correct answer is:

E(rX ) = 20%

E(rY ) = 10%

See the step by step solution

Step by Step Solution

Given information

Probability (scenario- Bear Market) = 0.2

Probability (scenario-Normal Market) = 0.5 and

Probability (scenario- Bull Market) = 0.3

Return for Stock X (all 3 scenarios) = --20%, 18% and 50%

Return for Stock Y (all 3 scenarios) = --15%, 20% and 10%

Calculation of expected return for stocks X and Y

Expected return = [Probability (Scenario) x Return in Scenario]

Hence,

E(rX) = [0.2 x (–20%)] + [0.5 x 18%] + [0.3 x 50%)] = 20%

E(rY) = [0.2 x (–15%)] + [0.5 x 20%] + [0.3 x 10%)] = 10%

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