Question 6 (25 marks) Suppose the risk-free rate is 2%, the market risk premium is 6%, and you are given the following information about Stock A and Stock B. State of economy Probability of state of economy Rates of return if the state occurs Stock A Stock B 20% 12% 10% 9% -2% -3% Boom Normal Recession 0.3 0.6 0.1 a) Calculate the expected returns on Stock A and Stock B. (4 marks) b) What are the portfolio weights for Stock A and Stock B if the expected portfolio return is 10.56%? (3 marks) c) Calculate the standard deviations of returns for Stock A and Stock B. (5 marks) d) Can we measure the systematic risk for Stock A and Stock B? If yes, calculate it. If no, discuss what additional information is needed. (5 marks) e) If you form a portfolio that consists of 70% in stock A and 30% in stock B, then what is the expected return of the portfolio, and what is the return standard deviation of the portfolio? (5 marks) f) Suppose you consider investing either 100% in stock B or the portfolio that you have formed in part (). Discuss which investment (100% stock B or the portfolio) you would choose