1. Expected Returns and Deviations (15 Points)

State of the Economy Probability Return Stock A Return Stock B

Recession 0.3 -1.5% -12.0%

Normal 0.5 7.5% 15.5%

Expansion 0.2 18.0% 29.0%

a.) What is the expected return for each stock A and stock B? (2 points) b.) If an investor has $10,000 and invests 30% in Stock A and 70% in Stock B what is the expected total dollar return? (2 points)

Stock Prices

year- Stock A Stock B

2015- 72.42 83.93

2016- 69.56 66.34

2017 - 63.75 70.93

2018 72.95 90.01

2019- 71.17 98.99

2020 - 110.74 107.68

c.) Calculate the yearly (2016, 2017, 2018, 2019, and 2020) percentage change return for Stock A and Stock B (3 points) 2 d.) Based on the percentage returns calculated, what is the standard deviation and the coefficient of variation for Stock A and Stock B? Which one has the better riskreturn tradeoff? (4 points) e.) Assume you invest in both stocks (portfolio), what is the standard deviation and coefficient of variation? Is the portfolio a better option than investing in each stock individually? (4 Points)