11. There are two securities in the market, A and B. The price of A today is 50. The price of A next year will be 40 if the economy is in a recession, 55 if the economy is normal, and 60 if the economy is expanding. The probabilities of recession, normal times and expansion are 0.1, 0.8 and 0.1, respectively. A pays no dividends and has a correlation of 0.8 with the market portfolio. B has an expected return of 9 per cent, a standard deviation of 12 per cent, a correlation with the market portfolio of 0.2, and a correlation with A of 0.6. The market portfolio has a standard deviation of 10 per cent. a) Suppose you are an investor who is concerned only about systematic risk. Which security would you prefer? Why? (40 marks) b) What are the expected return and standard deviation of a portfolio consisting of 70 per cent of A and 30 per cent of B? (20 marks) c) What is the beta of the portfolio in (b)? (10 marks) Discuss the usefulness of the CAPM as a model for determining security returns. (30 marks) d) 11. There are two securities in the market, A and B. The price of A today is 50. The price of A next year will be 40 if the economy is in a recession, 55 if the economy is normal, and 60 if the economy is expanding. The probabilities of recession, normal times and expansion are 0.1, 0.8 and 0.1, respectively. A pays no dividends and has a correlation of 0.8 with the market portfolio. B has an expected return of 9 per cent, a standard deviation of 12 per cent, a correlation with the market portfolio of 0.2, and a correlation with A of 0.6. The market portfolio has a standard deviation of 10 per cent. a) Suppose you are an investor who is concerned only about systematic risk. Which security would you prefer? Why? (40 marks) b) What are the expected return and standard deviation of a portfolio consisting of 70 per cent of A and 30 per cent of B? (20 marks) c) What is the beta of the portfolio in (b)? (10 marks) Discuss the usefulness of the CAPM as a model for determining security returns. (30 marks) d)