Question $4$

The one$-$year returns on stock ABC and on the Market Portfolio depend on the State of the economy

according to the Table below.

a$)$ Show the expected return on ABC Stock is $6\%$ per year and the expected return on the Market

Portfolio is $8\%$ per year.

b$)$ Show that the standard deviation of the return on ABC Stock is $12\%$ per year and the standard

deviation on the Market Portfolio is $12\mathrm{.}9\%$ per year.

c$)$ Show that the beta of ABC stock is $0\mathrm{.}61.$

d$)$ The risk$-$free rate is $3\mathrm{.}8\%$ per year. Is the expected return on ABC Stock consistent with the

CAPM? Justify your answer.