There is stock A whose rate of return is changed depending on the economic condition. The expected rate of return of A is 20% if economic condition is good, and –5% if economic condition is bad. it is estimated that the probability of good economy is 60% and that the probability of bad economy is 40%. The market return is 5% and the standard deviation of market return is 3%. The risk free rate is 2%

1.Compute the rate of return and the standard deviation of stock A.

2.Compute beta coefficient of stock A. the correlation coefficient of market and stock A return is 0.3.

3.Suppose that you construct portfolio of stock A and stock B. stock B has 8% of return and 4% of standard deviation. If you invest 60% of your money in stock A and 40% in stock B, what is rate of return on portfolio? what is standard deviation of portfolio`s return? It is assumed that the correlation coefficient of two assets is 0.2.