Calculating Returns and Standard Deviations Based on the following information, calculate the expected returns and standard deviations for the two stocks.

Rate of Return if State Occurs

State of Economy	Probability of State of Economy	Stock A	Stock B
Recession	.10	.02	-.30
Normal	.50	.10	.18
Boom	.40	.15	.31

1. Assume probability of state of economy to be equal, that is 1/3 for each state of economy.

2. Construct an equally weighted portfolio of Stock A and Stock B (50% of Stock A and 50% of Stock B). Determine the expected return and standard deviation of such a portfolio.

3. Compare the standard deviation of this portfolio to the average standard deviation of Stock A and Stock B. Which is lower? Explain.

4. Assume return on Stock A has a correlation coefficient of 0.70 with the market portfolio, S&P500, and return on Stock B has a correlation coefficient of 0.45 with the market portfolio, S&P500, and that the return of S&P 500 has a standard deviation of 25%. Determine the beta of Stock A and the beta of Stock B.