Question 3 Eastley Limited and Northway Limited are companies entered Metaverse businesses. The returns on both companies over the next year are expected to be: Economic conditions Strong growth Moderate growth Normal Recession Probability 0.2 0.3 0.4 0.1 Eastley Limited 14% 11% 9% -4% Northway Limited 18% 12% 7% -10% Required: (a) Calculate the expected returns, standard deviations and covariance for both Eastley Limited and Northway Limited. (10 marks) (b) If Eastley Limited and Northway Limited are combined in a portfolio with 60% and 40% respectively. Find the expected return and standard deviation of the portfolio. (4 marks) (c) Suppose you are given another task to analyze the following information: Stock Beta Expected return 1.5 13% B 0.8 10.4% 1.23 15% D 0.82 Risk-free rate = 4% Expected return on the market portfolio = 10% 8% Based on the Capital Asset Pricing Model (CAPM), indicate whether each of the above stocks is correctly priced, over-priced or under-priced. Prove by your calculations. (8 marks) (d) Distinguish between systematic risk and unsystematic risk. (3 marks) (Total 25 marks)