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Table below presents the state-based returns of securities A and B, the risk-free security and the...

  1. Table below presents the state-based returns of securities A and B, the risk-free security and the market portfolio, where pis the probability of each state. Use the information therein to answer parts aand b.

State

p

Security A

Security B

Risk-free security

Market portfolio

Recession

0.5

-4%

48%

2%

-6%

Normal

0.4

10%

-10%

2%

25%

Boom

0.1

30%

-30%

2%

30%
  1. Calculate the expected return and its standard deviation of securities A and B.
  2. Suppose you borrow $20,000 at the risk-free rate and along with the $40,000 you have, you invest $10,000 in security A and $50,000 in security B. Calculate the expected return, its standard deviation and CAPM-implied beta of this portfolio.

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jeff jeffy answered 1 year ago
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