Question: Consider the simple two-period model. Let today be period zero and tomorrow be period 1. Assume that today's price of stock A is $23 and

Consider the simple two-period model. Let today be period zero and tomorrow be period 1.

Assume that today's price of stock A is $23 and tomorrow price could be $28 or $21 with equal probabilities. Answer the following questions:

What is the expected rate of return on stock A?

What is the risk of stock A?

Assume that you want to allocate your initial wealth of $1,000 on a portfolio that consists of stock A and of stock B, with equal weights to each stock. If stock B is currently traded at $24, has an expected rate of return of 4 percent, variance of 900, and covariance between the two stocks is 25, characterize this portfolio; that is, find the expected rate of return on this portfolio and its risk.

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