Question: 2. Risk & Return (a) Returns for each stock in three economic state are summarized below: State of Economy Rate of Return if State Occurs

2. Risk & Return (a) Returns for each stock in three

2. Risk & Return (a) Returns for each stock in three economic state are summarized below: State of Economy Rate of Return if State Occurs Valued Stock Growth Stock Recession Normal Boom Probability of State of Economy 35% 40% 25% 6% 10% 18% -40% 19% 90% An investor invested $100,000 in a portfolio with 60% invested in valued stock, 40% invested in growth stock. Calculate the expected return and standard deviation of the portfolio? Assume market efficiency and both stocks are correctly priced according to the CAPM. The risk-free rate is 3.5% and the market risk premium is 10 %. Which stock has the most systematic risk? Which one has the most unsystematic risk? Which stock is "riskier"? Explain. (20 Marks)

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