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Question 2 1. Consider the following investment options along with the designated probability distribution of returns for each: (6 marks) Economic state Probability of T-Bill Stock A Stock B occurrence Very poor 0.1 5.5% (15)% 30% Poor 0.2 5.5% 5% 20% Average 0.4 5.5% 17% 10% Good 0.2 5.5% 20% 0% Very good 0.1 5.5% 35% (10)% The expected return of stock B is 10% and beta of stock B is 0.8. Market risk premium is 6%. a) What's the required rate of return of stock A, if market is premium is 6% and the stock has a beta of 1.3? b) What's the standard deviation of stock A? c) Construct an equal investment portfolio of stock A and stock B and calculate the portfolio's standard deviation. d) What is the portfolio's required rate of return? II. Company X has a beta of 0.70, while Company Y's beta is 1.20. The required return on the stock market is 11.00%, and the risk-free rate is 4.25%. A fund has $3500 invested in company X stock and $4500 invested in the stock of company Y. (6 marks) a) What is fund's required rate of return? b) Suppose you sell all of your holdings in stock Y and invest $4500 in stock Z having beta of 1.5. What is the fund's new beta after this transaction? Question 2 1. Consider the following investment options along with the designated probability distribution of returns for each: (6 marks) Economic state Probability of T-Bill Stock A Stock B occurrence Very poor 0.1 5.5% (15)% 30% Poor 0.2 5.5% 5% 20% Average 0.4 5.5% 17% 10% Good 0.2 5.5% 20% 0% Very good 0.1 5.5% 35% (10)% The expected return of stock B is 10% and beta of stock B is 0.8. Market risk premium is 6%. a) What's the required rate of return of stock A, if market is premium is 6% and the stock has a beta of 1.3? b) What's the standard deviation of stock A? c) Construct an equal investment portfolio of stock A and stock B and calculate the portfolio's standard deviation. d) What is the portfolio's required rate of return? II. Company X has a beta of 0.70, while Company Y's beta is 1.20. The required return on the stock market is 11.00%, and the risk-free rate is 4.25%. A fund has $3500 invested in company X stock and $4500 invested in the stock of company Y. (6 marks) a) What is fund's required rate of return? b) Suppose you sell all of your holdings in stock Y and invest $4500 in stock Z having beta of 1.5. What is the fund's new beta after this transaction