(Please answer ONLY number 5 with equations and shown work!)

1. A: The stocks of Apple and Amazon have the following expected returns:

State of Economy	Probability of State of Economy	Apple's Return if State Occurs	Amazon's Return if State Occurs
Recession	55%	-9%	-12%
Normal	30%	8%	11%
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 is 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	1.15
Stock C	?	1.29
Risk-free asset	?	?

4. Suppose you observe the following situation:

Security	Beta	Expected Return
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. Everything should be linked with the development of the CAPM ] (20 points)