Suppose that you are considering investing in two stocks for one year: Stock A and Stock B. The current price of stock A is $60 and analysts forecast a price of $80 in one year if the economy is booming, or $50 if the economy enters a recession. The current price of Stock B is $30 and analysts forecasts a price of $36 in one year if the economy is booming and a price of $32 if the economy is in a recession. You believe that the probabilities of a recession is 40% and boom is 60%. Stocks A and B do not pay dividends.

Show your work. Please copy the cells from a spreadsheet and paste them into the box, OR type in your calculations directly. DO NOT upload pictures of your spreadsheet or your notes.

d) Compare the expected returns given by the analyst (that you computed in a) with those when you calculated in part c in order to identify if these stocks (Stock A and/or Stock B) are undervalued or overvalued and explain why.