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The returns on two stocks depend upon the state of the economy. The information on their returns and beta coefficients is as follows: Case Boom
The returns on two stocks depend upon the state of the economy. The information on their returns and beta coefficients is as follows: Case Boom Normal Bust Beta Probability 0.2 0.3 0.5 A 30% 10% -10% 1.5 B 5% 10% 20% -1.2 a. What is the expected return and standard deviation of each stock? (8 marks) b. Suppose you invest in a portfolio with 50% of the investment in stock A and B, respectively. What are the expected return, standard deviation and beta for the portfolio? (8 marks) c. If you have already held a well diversified investment portfolio, you need to look at the standard deviation of stock A and B when you evaluate whether they can be added to your portfolio. Is this true or false? Explain. (6 marks) d. Give ONE example of stock B
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