on portfolio 2? 31. Using CAPM (LO1, 4) There are two stocks in the market, stock A and stock B. The price of stock A today is $65. The price of stock A next year will be $53 if the economy is in a recession, $73 if the economy is normal, and $85 if the economy is expanding. The probabilities of recession, normal times, and expansion are 0.2, 0.6. and 0.2, respectively. Stock A pays no dividends and has a beta of 0.68. Stock B has an expected return of 13%, a standard deviation of 34%, a beta of 0.45, and a correlation with stock A of 0.48. The market portfolio has a standard deviation of 14%. Assume the CAPM holds. a. What are the expected return and standard deviation of stock A? b. If you are a typical, risk-averse investor with a well-diversified portfolio, which stock would you prefer? Why? c. What are the expected return and standard deviation of a portfolio consisting of 60% of stock A and 40% of stock B? d. What is the beta of the portfolio in (c)