Consider the following information about the market and two individual stocks:

State of Economy

Probability of

State

Bust

Normal

Boom

$0\mathrm{.}15$

$0\mathrm{.}5$

$0\mathrm{.}35$

Market return if

State Occurs

$-3\%$

$7\%$

$12\%$

Individual Stock Return if

State Occurs

Stock ANT

Stock BEE

$-9\%$

$-2\%$

$5\%$

$-9\%$

$24\%$

$18\%$

a$)$ What are the expected returns and standard deviations of stocks ANT and BEE? $(4$ marks$)$

Which stock has more total risk? Explain.

$(1$ marks$)$

b$)$ What is the expected market return?

If the risk$-$free rate is $2\%,$ what is the market risk premium?

$(2$ marks$)$

$(2$ marks$)$

c$)$ Compare stocks ANT and BEE, which stock has more systematic risk? Which stock has more unsystematic risk? Explain.

$(4$ marks$)$

d$)$ You have $100$ million to invest in the two stocks, and you plan to invest $40$ million in stock

ANT and $60$ million in stock BEE.

What would be the portfolio expected return and standard deviation?

If the inflation rate is $3\%,$ what's the portfolio's real return?

What is the portfolio's beta?