Exercise 2 Consider the following information about the portfolio which contains two stocks: State of Economy Boom Normal Recession Probability 0.2 0.6 0.2 + Return if State occurs Stock B 15% 7% -4% Stock A 20% 12% -8% a) What is the standard deviation of the returns and expected return of each stock? b) What is the standard deviation of the returns and expected return on a $40,000 portfolio which consists of stocks A and B? Stock B is valued at $15,000. If the expected T-bill rate is 3.70 percent, what is the expected risk premium on the portfolio