4. Consider the following possible returns on stock A, stock B, and the market portfolio over the next year: State of economy Probability of state Return on Return on Return on occurring stock A stock B market Recession 0.2 -6% 20% -5% Normal 0.5 10% 8% 8% Boom 0.3 18% -20% 12% (e) Calculate the expected return and standard deviation of a portfolio that is composed of 40% of A and 60% of B. (1) What do your answers in parts (b), (c), and (e) imply about diversification? (g) A broker has advised you not to invest in stock B because it has a higher standard deviation. Is the broker's advice sound for a risk-averse investor like yourself? Why or why not? VL Recession Normal Boom ung 0.2 0.5 0.3 stock A -6% 10% 18% stock B 20% 8% -20% market -5% 8% 12% (a) What are the expected returns on stock A, stock B, and the market? (b) What are the standard deviations of returns on stock A, stock B, and the market? 3 (c) What is the correlation between the returns on the two stocks? (d) What are the betas of the two stocks? (e) Calculate the expected return and standard deviation of a portfolio that is composed of 40% of A and 60% of B. an