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 $95 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 beta of 0.78 . Stock B has an expected return of 13%, a standard deviation of 34%, a beta of 0.55 , and a correlation with stock A of 0.48 . The market portfolio has a standard deviation of 14%. Assume the CAPM holds. a. What are the expected return and standard deviation of stock A? (Do not round intermediate calculations. Round the final answers to 2 decimal places.) b. If you are a typical, risk-averse investor with a well-diversified portfolio, which stock would you prefer? Stock A Stock B c. What are the expected return and standard deviation of a portfolio consisting of 55% of stock A and 45% of stock B? (Do not. round intermediate calculations. Round the final answers to 2 decimal places.) d. What is the beta of the portfolio in (c)? (Do not round intermediate calculations. Round the final answer to 3 decimal places. Beta of the portfolio 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 $95 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 beta of 0.78 . Stock B has an expected return of 13%, a standard deviation of 34%, a beta of 0.55 , and a correlation with stock A of 0.48 . The market portfolio has a standard deviation of 14%. Assume the CAPM holds. a. What are the expected return and standard deviation of stock A? (Do not round intermediate calculations. Round the final answers to 2 decimal places.) b. If you are a typical, risk-averse investor with a well-diversified portfolio, which stock would you prefer? Stock A Stock B c. What are the expected return and standard deviation of a portfolio consisting of 55% of stock A and 45% of stock B? (Do not. round intermediate calculations. Round the final answers to 2 decimal places.) d. What is the beta of the portfolio in (c)? (Do not round intermediate calculations. Round the final answer to 3 decimal places. Beta of the portfolio
