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The table below presents information about the returns of stock A and B, under three possible scenarios (Boom, Normal, and Recession). The expected probabilities of
The table below presents information about the returns of stock A and B, under three possible scenarios (Boom, Normal, and Recession). The expected probabilities of each state are also ified in the table. The expected market return is 8% and the total risk of the market portion 5%. The default-free yield curve is currently flat and the risk-free interest rate for all matcm estimated to be 5%. 15.6.6= 8.4. Scenario Probability Boom 20% 5% Normal 50% Recession 30% Stock A Stock B 15% 6% (A) 6% 2% 5% ( B ) 6.6% 5% (c )4.26% (D)0% ( e )1.024 0.5 I ( FO Expected return Standard deviation Correlation with the market portfolio 0 Beta Required: a) Complete the blanks in the above table. Show your calculations. (9 marks) Suppose there is stock C whose expected return is 8% and standard deviation of its retur 7%. You wish to combine stocks A and B in order to create a portfolio that has the sam risk as the stock C. What weight should you invest in stock A? In stock B? What would the expected return of the portfolio made of A and B? (4 marks) ate a portfolio that has the same total
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