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

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. What is the expected return on Stock A & Stock B?
2. What is the standard deviation of Stock A & Stock B?
3. With a mix of 60% Stock A and 40% Stock B what is the portfolio return?
4. What would the mix of the two stocks be to have a portfolio return of 7.5%?