QUESTION 4 [25 MARKS] (a) Econ Foster Ltd is evaluating its investment in two assets, Stock A and Stock B. The company is uncertain about the state of the economy which is expected to be at boom, normal or in recession. The probability of the state of the economy and the corresponding expected return of the two assets is given below. Use the information below and answer each of the questions which follow. Probability Return on Stock A Return on Stock B Economic State Boom Normal Recession 20% 50% 30% -15% 20% 60% 20% 30% 40% (i) Calculate the Expected Return on Stock A. [2 marks] (ii) Calculate the Variance of the returns on Stock A. [4 marks] (iii) Calculate the Standard Deviation of the returns on Stock A. [1 mark] (iv) Find the Expected Return on Stock B. [2 marks] (v) Find the Variance of the returns on Stock B. [4 marks] (vi) Find the Standard Deviation of the returns on Stock B. [1 mark] (vii) Calculate the expected return for an investor who holds 60% and 40% of his investment in Stock A and Stock B respectively. [2 marks] (b) The Capital Asset Pricing Model has been built up on certain specific assumptions and same have been questioned to be unrealistic. Briefly explain the main assumptions and limitations of CAPM. [5 marks] (c) The total variability in returns of a security represents the total risk of that security and the two components of this total risk are systematic risk and unsystematic risk. Differentiate between these two components of total risk. [4 marks]