1. There are two assets and two states of the economy.

State of Probability Rate of Return Rate of Return

Economy of State of Stock A of Stock B

Recession 0.60 -10% 15%

Boom 0.40 30 -5

Suppose you have $30,000 total. If you put $9,000 in Stock A and the remainder in Stock B, what will be the expected return and standard deviation on your portfolio? (5 points)

2. You own a portfolio equally invested in a risk-free asset and two stocks. If one of the stocks has a beta of 1.20 and the beta of the portfolio is 1.80, what is the beta of the other?

3.Suppose you observed the following situation:

Security Beta Expected Return

Cooley, Inc. 1.6 19%

Moyer Co. 1.2 16%

What would the risk-free rate have to be if these securities are correctly priced?