Question 1. Consider the following probability distribution of returns on stock A and the market portfolio. Assume that the CAPM holds and correctly prices all assets. State of Economy Probability Stock A Market Bust 0.3 4% 4% Normal 0.4 13% 10% Boom 0.3 22% 16% a) If another stock, Stock B, has a beta of 1.2, what is its CAPM expected return? (6 marks) b) A rational mean-variance optimizing investor under the CAPM seeks a 15% expected return for the investment of her entire wealth. Determine the standard deviation of her (complete) portfolio. (2 marks) c) Stock C has a beta of 0 and a return standard deviation of 5%. What is the minimum return standard deviation of two-asset portfolios consisting of Stock C and the market portfolio? (2 marks) (Total for Question: 10 marks)