QUESTION SIX

Economic State	Probability	Returns: Stock X	Returns: Stock Y
Recession	20%	5%	7%
Normal	60%	15%	14%
Boom	20%	25%	21%

1. Compute the Holding Period Return [HPR] of stock Y for the scenario of a recession. [2 Marks]

2. Calculate the correlation coefficient of the above two stocks. [6 Marks]

3. Given that the Treasury Bill return is 5%, construct the Security Market Line [SML] and clearly label the above two stocks. [5 Marks]

4. Inflation is expected to increase from 6% to 8%. Show the effect of this on the SML you constructed in part C. [3 Marks]

5. Name and briefly describe any TWO [2] types of systematic risks. [4 Marks]

[TOTAL: 2