) Consider the following situation:
State of Economy | Probability of State of Economy | Returns if State Occurs |
Stock A | Stock B | Stock C |
Boom | 20% | 25% | 10% | 5% |
Recession | 80% | -30% | 5% | 10% |
The expected return on the marketportfolio is 7% and the US Treasury bill yields 3%. The capitalmarket is currently in equilibrium.
- (5 points) Which stock has the most systematic risk? Provideall the steps and equations.
- (5 points) Which stock has the most unsystematic risk? Explainwhy. Provide all the steps and equations.
- (10 points) What is the standard deviation of a portfolio whichis comprised of $8,400 invested in stock A, $3,600 in stock B, and$8,000 in stock C?
- ) If the expected inflation rate is 2.5%, what is the exactexpected real return on the portfolio of part (c)?
