E(R)

Stock A Stock B

State p(i) E(Ra) E(Rb)

Recession 30% -30% -20%

Normal 40% 10% 10%

Expansion 30% 50% 30%

Beta 1.4 1.25

R_f 3%

R_M 8%

1. What is the expected return on Stock A across all market situations?

What is the expected return on Stock B across all market situations?

2. What is the standard deviation of Stock As return?

What is the standard deviation of Stock Bs return?

3. With a mix of 75% Stock A and 25% Stock B what is the portfolio return?

With a mix of 75% Stock A and 25% Stock B what is the portfolio standard deviation?

4. Which of the two stocks has higher total risk?

Which of the two stocks has higher systematic risk?

5. Which of the two stocks has a higher Reward-to-Risk Ratio?

Are the two stocks under or over-valued based on the Capital asset Pricing Model?

6. What return would you expect on each stock based on the Capital Asset Pricing Model?