Question 5 (20 marks) (a) Suppose you observe the following situation on two securities: Security Beta Expected Return Pete Corp. 0.8 0.12 Repete Corp. 1.1 0.16 Assume these two securities are correctly priced. Based on the CAPM, what is the return on the market? (4 marks) (b) There is a certain stock that had returns of 10%, -23%, -15%, 20% and 13% for the last five years. What was the standard deviation of the stock's returns for the five-year period? (6 marks) (e) What is the expected retum and standard deviation for the following stock? (6 marks) Probability of State Rate of Return it State of Economy of Economy State Occurs Recession 0.10 -0.19 Normal 0.60 0.14 Boom 0.30 0.35 (d) You own a portfolio equally invested in a risk-free asset and two stocks. One of the stocks has a beta of 1.9 and the total portfolio is equally as risky as the market. What is the beta of the second stock? (4 marks) *** End of Paper *** Page 7 of 7