Scenario	Probability	Airline stock	Retailer Stock	Portfolio Return %
Big Boom	5%	40%	20%
Boom	25%	9%	4%
Normal	40%	4%	4%
Recession	25%	-15%	-10%
Deep recession	5%	-35%	-15%
Expected Return
Variance
Standard deviation

Risk & Return- CAPM - Corporate Finance

1. a) Calculate all values that are missing in the table above (indicated via the grey area). The portfolio weights the airline stock with 0.60 and the retailer stock with 0.40.

2. b) In the CAPM framework, a stocks standard deviation is not a sufficient statistic for a stock’s riskiness. Why?

3. c) Your junior analyst tells you that the Beta of the airline stock is 0.3 and that the Beta of the retailer stock is 1.5. Do you think that is reasonable given the firms’ business models? Why? (Note: elaborate on your economic intuition in 2-3 sentences; no calculation required.)

4. d) Assume you do believe your analyst. Which stock is the more attractive investment?

5. e) Your boss tells you to use a discount rate of 5% for all your decisions. How does that affect your choice of stock in d)?

6. f) Tell your boss in 2-3 sentences why it might not make sense to choose one discount rate for all investment decisions.