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?

(2 points)

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? (3 points)