Problem 3.Refer to the following information on the return distribution for two assets in which you are contemplating to invest in;

State of Economy	Probability that the state of economy occurs	Return if the state occurs Asset AA	Return if the state occurs Asset BB
BOOM	10%	40%	60%
AVERAGE	40%	20%	30%
BELOW AVERAGE	20%	20%	10%
POOR	30%	-20%	-30%

In addition to the above return distribution the two assets (AA& BB) operate in different industries and hence characterized by a market risk (Beta) of 2 and 3respectively. The market risk premium (RM- RF) or the slope for fairly correctly priced assets is 14%. In the same economy government treasury bills reward a risk free return of about 11%.

Required:

Calculate the expected return for assets AA & BB respectively

Calculate the required rate of return assets AA & BB respectively using the CAPM

Calculate the standard deviation for assets AA& BB respectively

If the company wants to invest in the two assets with the ratio of 45:55 what is the Portfolio standard deviation and Portfolio return