1.

a) What are the expected returns of the two stocks?

b) What are the standard deviations of the two stocks?

c) What are the beta of the two stocks?

d) Based on your calculation in b and c, which stock is risker in terms of total risk, which stock is riskier in terms of systematical risk?

e) If you invest 50% in stock A and 50% in stock B, what is the expected return and standard

deviation of your portfolio?

You expect that the likelihood of economic recession and boom is 20% and 80% respectively. Based on this basic forecast, you further estimate the returns for two stocks when the economy state is either recession and boom. Your estimation is as follow: Probability of State of State of Economy Economy Returns if State Occurs Stock A Stock B Recession 0.20 -0.30 -0.01 Boom 0.80 0.15 0.10 The market risk premium is 4%, and the risk-free rate is 1.5%