1. Fredricks Investment Management is considering two possible investment projects for next year. Each investment has a 1-year life, and investment returns depend on next years state of the economy. The estimated rates of return are shown in the table

Probability

State of of each State Rate of Return if State Occurs

The Economy Occurring GE Facebook

Boom 0.50 30% 35%

Normal 0.50 5% 11%

Bust 0.20 -15% -25%

Beta 0.34 1.07

1-year t-bond rate = 0.3%

• Rank the alternatives on the basis of (1) expected return and (2) risk. What investment would you choose? Explain.

• What is the probability of achieving greater than a 5 percent return on each investment alternative?
• What is the portfolio beta of a portfolio with 40 percent invested in GE and 60 percent in Facebook?