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Economic Condition (probability) Stock A (40% of portfolio) Stock B (60% of portfolio) Recession (.15) 0.00% -25% Normal (.70) 12% 15% Boom (.15) 20% 45%
| Economic Condition (probability) | Stock A (40% of portfolio) | Stock B (60% of portfolio) |
| Recession (.15) | 0.00% | -25% |
| Normal (.70) | 12% | 15% |
| Boom (.15) | 20% | 45% |
a) Assuming a 5% risk free rate, a Beta of 0.9 for company A, and a Beta of 1.5 for company B, which company (above) offers the best market-risk adjusted return?
b) If the required rate of return on the market portfolio is 10% and the market is efficient, is the above portfolio (40% A, 60% B) over-, under-, or fairly-priced?
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