Hotels A and B have the following probability distributions of expected future returns:

EconomyProbabilityHotel AHotel B

Recession40%(5%)5%

Stable30% 10%15%

Boom30% 15%20%

1.Calculate the expected rates of return k_A and k_B for Hotels A and B.

k_A =

k_B =

2.Calculate the coefficient of variation for Hotels A and B. The standard deviation of the returns for Hotel A is 15% and for Hotel B is 18%.

CV_A =

CV_B =

3.By comparing the coefficients of variation above, which hotel investment is riskier? (A or B)

Hotel

4.Hotel A's stock has a beta of 1.3 and Hotel B's stock has a beta of 1.4.The risk free rate is 2.25% and the market rate is 8%.Calculate the required rates of return for Hotel A and Hotel B stocks.

Hotel A = Hotel B =

5.Suppose you have invested $1,000,000 in a diversified portfolio as follows:

StockInvestmentBeta

1250,0001.10

2350,0001.30

3400,000.90

What is the beta of the portfolio?

What is the required rate of return of the portfolio? (The risk free rate is 3.40% and the market rate is 9%.)

6.Given this information, would you add Hotel A's stock to your portfolio?