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Expected return and standard deviation of stock a

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There are two stocks in the market, Stock A and Stock B. the price of stock A today is $65. The price of stock A next year will be $53 if the economy is in a recession, $73 if the economy is normal and $85 if the economy is expanding. The probabilities of recession, normal times, and expansion are 0.2, 0.6 and 0.2, respectively. Stock A pays no dividends and has a beta of 0.68. Stock B has an expected return of 13%, and a standard deviation of 34%, a beta of 0.45, and a correlation with stock A of 0.48. The market portfolio has a standard deviation of 14%. Assume the CAPM holds.

a. What are the expected return and standard deviation of stock A?

b. If youare a typical risk-averse investor with a well-diversified portfolio, which stock would you prefer? why?

c. What are the expected return and standard deviation of a portfolio consisting of 60% of stock A and 40% stock B?

d. What is the Beta of te portfolio in (c)?

Reference no: EM133075470

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