5.3. There is stock A whose rate of return is changed depending on the economic condition. Rate of return on stock A on economic condition Normal 10% 0% The market return is 6% and the standard deviation of market return is 5%. The risk free rate is 4%. Compute the rate of return and the standard deviation of stock A. It is assumed that occurring probability of each economic condition is 10%, 40%, and 50% respectively. (2) Compute beta coefficient of stock A. The correlation coefficient of market and stock A return is 0.3. (1) (3) Expanding 20% Recession Calculate the required rate of return of stock A using CAPM. Draw a graph of SML and determine whether stock A is overvalued or undervalued (4) Suppose that you construct portfolio of stock A and stock B. Stock B has 10% of return and 5% of standard deviation. If you invest 60% of your money in stock A and 40% in stock B, what is rate of return on portfolio? What is standard deviation of portfolio's return? It is assumed that the correlation coefficient of two assets is 0.2. 2012