1) The stock of Business Adventurers sells for $30 a share. It likely dividend payout and end-of-year price depend on the state of the economy by the end of the year as follows.

	Dividend	Stock Price
Boom	$3.20	$52
Normal Growth	2.50	40
Recession	0.00	27

a. Calculate the expected holding-period return and standard deviation of the holding period return. All three scenarios are equally likely.

b. Calculate the expected return and standard deviation a portfolio invested half in Business Adventures and half in Treasury bills. The return on bills is 4%.

c. What is the complete portfolios 99% confidence interval based on your calculation from b?

2) Suppose that many stocks are traded in the market and that it is possible to borrow at the risk-free rate, r. The characteristics of two of the stocks are as follows (Suppose these two stocks are perfectly negative correlated):

Stock Expected Return Standard Deviation

A 4% 20%

B 7% 30%

a. How can we construct a riskless portfolio?

b. Calculate the expected rate of return on this risk-free portfolio?