5 2 ID IFM End-of-Term As... 5/6 IFM End-of-Term Assessment.pdf Question 4 (20 marks) Murphy, who has retired for several years, is considering investing in two stocks: A and B. The returns and other related estimates for the two stocks under different states of the world in the coming year are estimated as follows: Probability State of the World Good Normal Bad 0.1 0.7 0.2 Rate of Return if State Occurs Stock A Stock B 40% -6% 24% 18% -14% 30% Variables Stock A Stock B 18% Expected Return Standard Deviation 9.3% Beta 1 0.75 (a) Calculate the expected rate of return and standard deviation of Stock A. (6 marks) (b) If Murphy could only invest in either Stock A or Stock B, which asset should he choose? Explain. (3 marks) Assume that the covariance between Stock A and Stock B is -0.01055842 or -105.5842%. Compute the expected return and standard deviation of returns of Portfolio AB in which 40% of its value is invested in Stock A and the remainder in Stock B. (6 marks) (d) If Murphy could choose to invest in between Stock A, Stock B and the Portfolio AB, which should he invest in? Explain. (2 marks) (e) Assume the risk-free rate is 4% and the market risk premium is 19.5%. Based on CAPM, should Murphy invest in the Portfolio AB