a) Calculate the expected return and beta of each stock. What is the correlation of each stock with the market?

b) You have $100,000 to invest in a portfolio containing stock A and stock B. Your goal is to create a portfolio that has an expected return of 14 percent. How much money will you invest each in stock? What is the beta of the portfolio? What is the total risk (standard deviation) of the portfolio?

c) Suppose you have an additional $50,000, which you will invest at the risk-free rate in addition to the portfolio in part (b) above. Hence, the new portfolio is worth $150,000. What are the expected return, beta and total risk for this new portfolio?

2. The risk-free rate is 4 percent and the expected market return is 10 percent. You observe the following situation for Stocks A and B: State of the Economy Probability of state Stock A return Stock B return Bust 0.15 -0.08 -0.05 Normal 0.70 0.13 0.14 Boom 0.15 0.48 0.29 The standard deviation of returns is 15.67% for stock A and 9.36% for stock B while their correlation is 0.95. The standard deviation of the market is 5%. 2. The risk-free rate is 4 percent and the expected market return is 10 percent. You observe the following situation for Stocks A and B: State of the Economy Probability of state Stock A return Stock B return Bust 0.15 -0.08 -0.05 Normal 0.70 0.13 0.14 Boom 0.15 0.48 0.29 The standard deviation of returns is 15.67% for stock A and 9.36% for stock B while their correlation is 0.95. The standard deviation of the market is 5%