Consider the following details for two shares, Share A and Share B.

State of Probability of Rate of return if State Occurs

Economy State of Economy Stock A Stock B

Recession .20 .01 -0.25

Normal .55 .09 .15

Boom .25 .14 .38

(a) What is the expected return for each share?

(b) What is the risk for each share?

(c) If a risk-averse investor wanted to invest in only one share, which one would they choose?

(d) What is the expected return on a portfolio consisting of 80% in A and the balance in B?

(e) What is the risk of the portfolio in (d)?