Question 2 I. 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)% Market risk premium 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 1.5? b) What's the standard deviation of stock A? c) Construct a portfolio of stocks with 40% of funds invested in stock A and the remainder in stock B. Calculate this 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 $4500 invested in company X stock and $3500 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. c) Suppose inflation increases by 2.5%, what is the portfolio's required rate of retum now? d) Suppose risk aversion increases by 1.5%, what is the portfolio's required rate of retum now