1. State of the Economy Probability of the States Percentage Returns

Economic recession 25% 5%

Moderate economic growth 55% 10%

Strong economic growth 20% 13%

1. What is the expected return?

2. What is the standard deviation?

2. The expected return on MSFT next year is 12% with a standard deviation of 20%. The expected return on AAPL next year is 24% with a standard deviation of 30%. If James makes equal investments in MSFT and AAPL, what is the expected return on his portfolio.

3. Siebling Manufacturing Company's common stock has a beta of .8. If the expected risk-free return is 2% and the market offers a premium of 8% over the risk-free rate, what is the expected return on Siebling's common stock?