Practice Problem 1 ( These questions are similar to what you'll see on youe Final Exam. Be sure to show all your work

You have a portfolio worth $100,000 consisting of two stocks, A and B. You invested $30,000 in stock A and the remainder in Stock B. Consider the following information:

State of the Economy

Probability

Of State

Return on A

Return on B

Growth

0.25

15%

8%

Normal

0.50

5%

20%

Recession

0.25

-10%

25%

Expected return 3.75%??

Standard deviation??6.26%

a) What is the expected return for Stock B?

b) What is the standard deviation for Stock A?

c) What is the expected return for the portfolio of these two securities?

Hint: Use the weighted average of the stock's individual standard deviation as that is all you have.

d) Are there benefits to forming a portfolio of these two securities? Explain in words. No calculations required.

f) Suppose the Beta of stock B = 1.8. You have determined the return on Government of Canada T-Bills = 3% and the return on the market portfolio = 12%. Is stock B correctly priced? Show your work and state whether you would recommend buying or selling Stock B and why.