The total value of your portfolio is $10,000: $3,000 of it is invested in Stock A...

The total value of your portfolio is $10,000: $3,000 of it is invested in Stock A and the remainder invested in Stock B. Stock A has a beta of 0.8; Stock B has a beta of 1.2. The risk premium on the market portfolio is 8%; the risk-free rate is 2%. Additional information on Stocks A and B is provided below.

		Return in Each State
State	Probability of State	Stock A	Stock B
Excellent	15%	15%	5%
Normal	50%	9%	7%
Poor	35%	-15%	10%

What are each stock’s expected return and the standard deviation?
What are the expected return and the standard deviation of your portfolio?
What is the beta of your portfolio?
1. Using CAPM, what is the expected return on the portfolio?
2. Given your answer above, would you buy, sell, or hold the portfolio?

Expert Solution

jeff jeffy answered 1 year ago

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