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Consider 2 scenarios: Boom Economy and Normal Economy. The Boom economy has 30% chance of happening,...

Consider 2 scenarios: Boom Economy and Normal Economy. The Boom economy has 30% chance of happening, while Normal economy has 70% chance of happening.

For each scenario (Boom and Normal), stock ABC has a return of 25%, and 4%, respectively; stock XYZ has a return of 10% and 6.5%, respectively; the market portfolio has a return of 12% and 5% respectively.

1) Calculate Expected return, Variance and Standard deviation for stock ABC and XYZ

2) Based on your results in part (1), can you decide which stock to invest?

3) Calculate Beta for stock ABC and XYZ

4) If the T-bill rate is 3%, what does the CAPM say about the fair expected rate of return on the two stocks? How does this result influence your investment decision?

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