1. Consider the following information about three stocks:

State of Economy	Probability of State of Economy	Rate of Return if State Occurs
		Stock A	Stock B	Stock C
Boom	0.4	0.24	0.36	0.55
Normal	0.4	0.17	0.13	0.09
Recession	0.2	0.00	-0.28	-0.45

(1) What is the expected return and standard deviation for stock A, B and C? (4 marks)

(2) If your portfolio is invested 40 percent each in A and B and 20 percent in C, what is the portfolio expected return? The standard deviation? (Hint: to calculate the standard deviation, you need to find the variance first. To calculate the portfolio variance, you may treat it as one single asset and apply the variance formula using probability and expected return at each state) (4 marks)

(3) If the expected T-bill rate is 3.80 percent, what is the expected risk premium on the portfolio? (2 marks)