There are two stocks in the market, Stock A and Stock B. The price of Stock A today is $77. The price of Stock A next year will be $66 if the economy is in a recession, $89 if the economy is normal, and $99 if the economy is expanding. The probabilities of recession, normal times, and expansion are .22, .58, and .20, respectively. Stock A pays no dividends and has a correlation of .72 with the market portfolio. Stock B has an expected return of 14.2 percent, a standard deviation of 34.2 percent, a correlation with the market portfolio of .26, and a correlation with Stock A of .38. The market portfolio has a standard deviation of 18.2 percent. Assume the CAPM holds. a-1.What is the return for each state of the economy for Stock A? (A negative answer should be indicated by a minus sign. Do not round intermediate calculations and enter your answers as a percent rounded to 2 decimal place e.g., 32.16.) a- What is the expected return of Stock A? (Do not round intermediate calculations 2. and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) a- What is the variance of Stock A? (Do not round intermediate calculations and round 3. your answer to 4 decimal places, e.g., 32.1616.) a- What is the standard deviation of Stock A? (Do not round intermediate calculations 4. and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) a- What is the beta of Stock A? (Do not round intermediate calculations and round 5. your answer to 3 decimal places, e.g., 32.161.) a- What is the beta of Stock B? (Do not round intermediate calculations and round 6. your answer to 3 decimal places, e.g., 32.161.) Answer is not complete. a- 1. Recession -14.29 % Normal 15.58 % Expansion 28.57 % Expected return 11.61 % Variance a- 2. a- 3. a- 4. a- 5. a- 6. Standard deviation 14.64 % Beta of Stock A Beta of Stock B If you are a typical, risk-averse investor with a well-diversified portfolio, which stock would you prefer? Stock A Stock B b- What is the expected return of a portfolio consisting of 65 percent of Stock A and 35 1. percent of Stock B? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) b- What is the standard deviation of a portfolio consisting of 65 percent of Stock A and 2. 35 percent of Stock B? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) C. What is the beta of the portfolio in part (b)? (Do not round intermediate calculations and round your answer to 3 decimal places, e.g., 32.161.) X Answer is not complete. % b- 1. b- 2. Expected return Standard deviation Beta of the portfolio C
