Question 4 [25 marks] 4.1 You are given the following data regarding the returns on stocks A and B. Probability 0.25 Return on Stock A -0.40 Returns on Stock B 0.12 Scenario Severe Recession Mild Recession Normal Growth Boom 0.10 0.30 0.35 0.15 0.20 0.50 0.06 0.01 -0.03 What is the expected return and standard deviation of a portfolio that is formed by holding 30% in stock A and the remainder in stock B? (12 marks) 4.2 Dean has savings of 50,000 that he would like to invest. Having followed the pharmaceutical firm Astrazeneca on the news, he plans to invest the entirety of his savings in Astrazeneca stock. (a) Explain if Dean's strategy of investing all of his savings in Astrazeneca stock is a good investment strategy. (3 marks) (b) Asset classes such as stocks and bonds have displayed varying performance over the past two decades. In contrast, cash has avoided any loss. Therefore, explain why investors do not simply hold cash. (2 marks) 4.3 Quark Inc has 6 million shares of common equity outstanding. The current price of these shares is 55 per share. The shares have a beta of 1.5. The firm also pays dividends of 10 per share on its preference shares, of which 500,000 are outstanding. The current market price of the preference shares is 60 per share. The firm's outstanding debt amounts to 8,000,000 with a pre-tax cost of 6.5%. Additionally, treasury bills currently yield 3% and the rate of return on the market is 14%. The company pays tax at 20%. Calculate and interpret the firm's weighted average cost of capital