1. The following two stocks are available for purchase. Utilize this information to answer questions A thru C.

E(R)

Stock A Stock B

State p(i) E(Ra) E(Rb)

Recession 20% -30% -20%

Normal 50% 10% 10%

Expansion 30% 30% 20%

Beta 1.8 1.2

R_f 3%

R_M 5%

1. If you were trying to minimize your portfolio risk what would be your mix of the two stocks?
2. Which of the two stocks has higher total risk?
3. Which of the two stocks has a higher Reward-to-Risk Ratio?