1. Use the following data:

State of the Economy Probability Stock A: Return Stock B: Return

Boom 0.2 30% 45%

Good 0.35 12% 10%

Poor 0.25 8% -15%

Recession 0.2 -20% 0%

1. If a portfolio is formed by investing 40% of the funds in A , and 60% in B;

what would be the expected return on the portfolio?

What would be the standard deviation of the above portfolio?

2. A firms stock has a beta of 1.25; the expected return on the market is 10%; and the risk-free rate is 2%. What is the expected rate of return on this stock? Also calculate the market risk premium.