Suppose also that expected market return is 10% and risk-free rate is 2%.

(a) (1 point) Give an example of a company that can generate such a big positive return in the pandemic state.

(b) (5 points) Compute expected returns and standard deviations for stocks A and B.

(c) (5 points) Compute the correlation between stock returns.

(d) (5 points) Compute market betas for stocks A and B. What is market risk premium?

(e) (4 points) Which stock has more systematic risk? Total risk?

(f) (5 points) Suppose that you have $1, 000 and you invest $400 of it in share A, $500 in share B and remaining in risk-free asset. Compute mean, standard deviation, market beta of your portfolio.

4. (25 points) Suppose that you are provided with the following information: State Probability RA RB 0.20 Boom Normal Recession Pandemic 0.58 0.20 20% 12% 4% -40% 15% 10% 5% 50% 0.02 Suppose also that expected market return is 10% and risk-free rate is 2%. (a) (1 point) Give an example of a company that can generate such a big positive return in the pandemic state. 2 (b) (5 points) Compute expected returns and standard deviations for stocks A and B. (c) (5 points) Compute the correlation between stock returns. (d) (5 points) Compute market betas for stocks A and B. What is market risk premium? (e) (4 points) Which stock has more systematic risk? Total risk? (f) (5 points) Suppose that you have $1,000 and you invest $400 of it in share A, $500 in share B and remaining in risk-free asset. Compute mean, standard deviation, market beta of your portfolio