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Consider the following information about stocks A, B, and C:
| State of economy | Probability of state of economy | Rate of return if state occurs | |
| Stock A | Stock B | Stock C |
| Boom Bust | 0.70 0.30 | 0.20 -0.05 | 0.15 -0.10 | 0.30 -0.15 |
The expected return on the market portfolio is 8% and the risk-free rate is 3%.
(a) What is the expected rate of return on stock A, B, and C, respectively?
(b) What is the standard deviation of stock A, B, and C, respectively?
(c) Which stock is the safest for rational investors? Back up your assertion.
(d) What is the portfolio expected return if it is composed of 30% of Stock A, 50% of Stock B, and 20% of Stock C?
(e) What is the standard deviation of a portfolio if it is composed of 30% of Stock A, 50% of Stock B, and 20% of Stock C?
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