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There are two stocks in the market, stock A and stock B. The price of stock A today is $75. The price of stock
There are two stocks in the market, stock A and stock B. The price of stock A today is $75. The price of stock A next year will be $63 if the economy is in a recession, $83 if the economy is normal, and $96 if the economy is expanding. The probabilities of recession, normal times, and expansion are 0.2, 0.6, and 0.2, respectively. Stock A pays no dividends and has a correlation of 0.8 with the market portfolio. Stock B has an expected return of 13 percent, a standard deviation of 34 percent, a correlation with the market portfolio of 0.25, and a correlation with stock A of 0.48. The market portfolio has a standard deviation of 18 percent. Assume the two stocks are not necessarily correctly priced. a-1. Calculate the expected return of stock A. (Round the final answer to 2 decimal places. Do not round the Intermediate calculations.) Expected return % a-2. Calculate the beta of both stock A and stock B. (Round the final answers to 3 decimal places. Do not round the Intermediate calculations.) BA a-3. If you are a typical, risk-averse Investor with a well-diversified portfolio, which stock would you prefer? Stock A Stock B b&c. What are the expected return, standard deviation and beta of a portfolio consisting of 70 percent of stock A and 30 percent of stock B? (Round the beta value to 3 decimal places and other values to 2 decimal places. Do not round the intermediate calculations.) Expected return Standard deviation Beta
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