Question: Problem 2 You are given the following information about Stocks A and B: Rate of Return if State Occurs State of Economy Probability of Stock

Problem 2 You are given the following information about Stocks A and B: Rate of Return if State Occurs State of Economy Probability of Stock A Stock B State of Economy Boom 0.25 18% 20% Normal 0.50 6% 15% Recession 0.25 -5% 2% Stock A has a beta of 0.325 and Stock B has a beta of 1.000. Assuming that neither of these stocks is over or undervalued: a) What is the market risk premium and risk-'ee rate? b) What would be the beta of a portfolio consisting of 40% of Stock A and 60% of Stock B? c) What would be the expected return of the portfolio under b)

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