There are two stocks in the market: Stock A and Stock B. The price of Stock A today is $73. The price of Stock A next year will be $62 if the economy is in a recession, $85 if the economy is normal, and $95 if the economy is expanding. The probabilities of recession, normal times, and expansion are .18, .62, and .20, respectively. Stock A pays no dividends and has a correlation of .68 with the market portfolio. Stock Bhas an expected return of 13.8 percent, a standard deviation of 33.8 percent, a correlation with the market portfolio of .22, and a correlation with Stock A of .34. The market portfolio has a standard deviation of 17.8 percent. Assume the CAPM holds.

a-5.	What is the beta of Stock A? (Do not round intermediate calculations and round your final answer to 3 decimal places (e.g., 32.161).)

Beta of Stock A

a-6.	What is the beta of Stock B? (Do not round intermediate calculations and round your final answer to 3 decimal places (e.g., 32.161).)

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-1.	What is the expected return of a portfolio consisting of 70 percent of Stock A and 30 percent of Stock B? (Do not round intermediate calculations.Enter your answer as a percent rounded to 2 decimal places (e.g., 32.16).)

Expected return

%

b-2.	What is standard deviation of a portfolio consisting of 70 percent of Stock A and 30 percent of Stock B? (Do not round intermediate calculations.Enter your answer as a percent rounded to 2 decimal places (e.g., 32.16).)

Standard deviation

%

c.	What is the beta of the portfolio in part (b)? (Do not round intermediate calculations and round your final answer to 3 decimal places (e.g., 32.161).)

Beta of the portfolio