There are two stocks in the market, Stock A and Stock B . The price of Stock A today is $82. The price of Stock A next year will be $71 if the economy is in a recession, $94 if the economy is normal, and $104 if the economy is expanding. The probabilities of recession, normal times, and expansion are .27, .53, and .20, respectively. Stock A pays no dividends and has a correlation of .77 with the market portfolio. Stock B has an expected return of 14.7 percent, a standard deviation of 34.7 percent, a correlation with the market portfolio of .31, and a correlation with Stock A of .43. The market portfolio has a standard deviation of 18.7 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 places, e.g., 32.16.)

	Return
Recession	%
Normal	%
Expansion	%

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

Expected return

%

a-3.	What is the variance of Stock A? (Do not round intermediate calculations and round your answer to 4 decimal places, e.g., 32.1616.)

Variance

a-4.	What is the standard deviation of Stock A? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)

Standard deviation

%

a-5.	What is the beta of Stock A? (Do not round intermediate calculations and round your 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 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 B
	Stock A

b-1.	What is the expected return of a portfolio consisting of 75 percent of Stock A and 25 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.)

Expected return

%

b-2.	What is standard deviation of a portfolio consisting of 75 percent of Stock A and 25 percent of Stock B?(Do not round intermediate calculations and enter your answers 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 answer to 3 decimal places, e.g., 32.161.)

Beta of the portfolio