1. The following two stocks are available for purchase. Utilize this information to answer questions A thru J. (40 points)

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%?
5. If you were trying to minimize your portfolio risk what would be your mix of the two stocks?
6. Which of the two stocks has higher total risk?
7. Which of the two stocks has a higher Reward-to-Risk Ratio?
8. What return would you expect on each stock based on the Capital Asset Pricing Model?
1. Are the two stocks under or over-valued based on the Capital asset Pricing Model?
10. What mix of the two stocks would you choose?