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Given the following: State Probability End of Period Return Stock A Stock B 1 0.4 12% 14% 2 0.4 16% 15% 3 0.2 18% 16%

Given the following:

State

Probability

End of Period Return

Stock A

Stock B

1

0.4

12%

14%

2

0.4

16%

15%

3

0.2

18%

16%

  1. What are the expected return and standard deviation of the returns on stock B? (The expected return on A is 14.8%, and its standard deviation is 2.40%).

  1. Which stock a risk averse investor should select? Why?

  1. If you were to invest 30% of your money in A and the rest in B, what is the expected return and the standard deviation of your portfolio (Assume The covariance between A and B is zero)

  1. If A has a beta of 0.8 and B has a Beta of 1.5, What is the required return on the portfolio from part c, if the risk free rate is 5% and the expected return on the market is 13%?

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