Question 2: (10 marks) You have decided to invest in 100,000 shares of stock A at a price of $10 per share, and 50,000 shares of stock B at a price of $20 per share. You have also concluded that next year returns are the values in the tables below. You estimate that the correlation between the two stocks is +0.7. a) Calculate the expected return and risk (standard deviation) of your portfolio. Have you been able to diversify any risk by forming this portfolio? Why or why not? (7 marks) Stock A: State of the Economy Boom Stable Recession Probability 0.4 0.4 0.2 Rate of return 0.15 0.10 0.05 Stock B: State of the Economy Boom Stable Recession Probability 0.3 0.3 0.4 Rate of Return 0.12 0.10 0.08 b) Now assume that you want to create a portfolio combining only stock A and the risk-free asset. You want to create a portfolio such that the beta of the portfolio is 1.5. You know that the beta of stock A is 2. What is the expected rate of return of this portfolio