Homework Problems: (1) A: The stocks of Apple and Amazon have the following expected returns: State of Economy Probability of State Apple's Return if Amazon's Return of Economy State Occurs if State Occurs Recession 55% -9% -12% Normal 30% 8% Boom 15% 17% 14% Which company's stock is riskier, based on standard deviation? (20 points) B: If you have 120 shares of Apple's common stock ($171.05 per share) and 90 shares of Amazon's common stock ($1162.35 per share) in your portfolio, what is the expected return on your portfolio? (15 points) (2) Stock Y has a beta of 1.30 and an expected return of 15.3%. Stock Z has a beta of 0.70 and an expected return of 9.3%. If the risk-free rate if 5.5% and the market risk premium is 6.8%, are these stocks correctly priced? (15 points) (3) You have one million USD and want to create a portfolio equally as risky as the market. Given this information, fill in the rest of the following table: (15 points) Asset Investment Beta Stock A $195,000 0.90 Stock B $340,000 Stock C 1.29 Risk-free asset ? ? 1.15 (4) Suppose you observe the following situation: Security Beta Expected Retum Pete Corp. 1.15 12.90% Repete Co. 0.84 10.20% Assume the two securities are correctly priced. Based on CAPM, what is the expected return on the market? What is the risk-free rate? (15 points) (5) Explain the CAPM. [hint: we need to discuss systematic and unsystematic risks, diversification, assumptions CAPM makes, SML line, the model, things CAPM can't explain, etc. ] (20 points)