Question 4 (20 marks) Murphy, who has retired for several years, is considering investing in two stocks: A and B. The returns and other related estimates for the two stocks under different states of the world in the coming year are estimated as follows: Probability State of the World Good Normal Bad 0.1 0.7 0.2 Rate of Return if State Occurs Stock A Stock B 40% -6% 24% 18% 30% Stock A Stock B 18% Variables Expected Return Standard Deviation Beta 0.75 (a) Calculate the expected rate of return and standard deviation of Stock A. (6 marks) (b) If Murphy could only invest in either Stock A or Stock B, which asset should he choose? Explain. (3 marks) (c) Assume that the covariance between Stock A and Stock B is -0.01055842 or -105.5842%. Compute the expected return and standard deviation of returns of Portfolio AB in which 40% of its value is invested in Stock A and the remainder in Stock B. (6 marks) (d) If Murphy could choose to invest in between Stock A, Stock B and the Portfolio AB, which should he invest in? Explain. (2 marks) (e) Assume the risk-free rate is 4% and the market risk premium is 19.5%. Based on CAPM, should Murphy invest in the Portfolio AB