Question: Short Answer - 40 Points (Version B) 1. Stocks A and B have the following probability distributions of expected future returns: B State of Economy

Short Answer - 40 Points (Version B) 1. Stocks A and B have the following probability distributions of expected future returns: B State of Economy A Probability 0.3 Recession -30% -10% Normal 0.4 10% 20% 40% Boom 30% 0.3 Stock A has a beta coefficient of 0.80 and stock B has a beta coefficient of 1.20. Assume that the risk-free return is 5% and the market risk premium is 6%. a a. Calculate the expected rate of return and the Sharpe ratio for stocks A and B. b. Using the CAPM formula, calculate the required return for stock A and for stock B, and explain whether they are overpriced, underpriced, or correctly priced

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