State Probability Stock A Return Stock B Return

state1 .4 .2 .4

state2 . 3 . 3 .4

state3, .3 .3 0

1. What is the expected return of Stock B? a. .26 b. .28 c. .30 d. .32

2. What is the covariance of the returns of Stock A and Stock B? a. .0012 b. -.0012 c. .0048 d. -.0048

3. A decrease in economy-wide interest rates tends to ________ the WACC and a decrease in the general level of stock prices tends to ________ the WACC. a. Increase; increase b. Decrease; increase c. Increase; decrease d. Decrease; decrease