1. (10 points) Suppose that you are considering investing in two stocks for one year: Stock A and Stock B. The current price of stock A is $100 and analysts forecast a price of $150 in one year if the economy is booming, or $80 if the economy enters a recession. The current price of Stock B is $50 and analysts forecast a price of $60 in one year if the economy is booming and a price of $55 if the economy is in a recession. You believe that the probabilities of a recession and boom are equal (50%). Stocks A and B do not pay dividends. SHOW YOUR WORK.

1. (2 points) Find the forecasted rate of returns for the 2 individual stocks in each state of the world. Then calculated the expected return (covering all states of the world) based on these forecasts. Fill in the table with your results (in %).

	% Return-Boom	% Return-Recession	% Expected Return
Stock A
Stock B

2. (4 points) Suppose that you decide to invest $40,000 in stock A and $60,000 in stock B. Find the expected return and standard deviation of the portfolio.
3. (2 points) Assume that both stocks have beta = 2.0. Further, the expected return on the market is 12% and the risk free is 3.5%. Calculate the expected return for both stocks if they were correctly priced.