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There are two stocks in the market: Stock A and Stock B. The price of Stock A today is $84. The price of Stock A next year will be $73 if the economy is in a recession, $96 if the economy is normal, and $106 if the economy is expanding. The probabilities of recession, normal times, and expansion are .29, .51, and .20, respectively. Stock A pays no dividends and has a correlation of .79 with the market portfolio. Stock B has an expected return of 14.9 percent, a standard deviation of 34.9 percent, a correlation with the market portfolio of .33, and a correlation with Stock A of .45. The market portfolio has a standard deviation of 18.9 percent. Assume the CAPM holds.

a-1. What is the return for each state of the economy for Stock A?

Return Recession %

Normal %

Expanding %

a-2. What is the expected return of Stock A? (Do not round intermediate calculations. 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 final 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.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 final 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 final 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? multiple choice Stock B Stock A

b-1. What is the expected return of a portfolio consisting of 70 percent of Stock A and 30 percent of Stock B? (Do not round intermediate calculations.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 70 percent of Stock A and 30 percent of Stock B? (Do not round intermediate calculations.Enter your answer 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 final answer to 3 decimal places (e.g., 32.161).) Beta of the portfolio

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