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%

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

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

What is the standard deviation of Stock As return?

What is the standard deviation of Stock Bs return?

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?

Which of the two stocks has higher total risk?

Which of the two stocks has higher systematic risk?

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?

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