Question:Risk and Return
1.Consider the following scenario analysis for Stocks A and B and for the market portfolio (M)
Rate of Return 

State of Economy 
Probability of State 
Stock A % 
Stock B % 
Market % 







Boom 
0.1 
30 
45 
33 

Good 
0.6 
12 
10 
15 

Average 
0.2 
1 
15 
5 

Bust 
0.1 
20 
30 
9 
a) Calculate the expected rate of return on each stock and the market? (15)
Stock A:
Expected Rate = = 30*0.1+12*0.6+1*0.220*0.1
= 8.4%
Stock B:
Expected Rate = = 45*0.1+10*0.615*0.230*0.1
= 4.5%
Market:
Expected Rate = = 33*0.1+15*0.65*0.29*0.1
= 10.4%
b) Find the standard deviation of returns for each asset? (15)
Stock A:
Standard deviation =
= 208.2
Stock B:
Standard deviation =
= 393
Market:
Standard deviation =
= 246.6
2. The risk free rate is 3% and the betas of the stocks are:
Stock Beta
A 1.20
B 0.70
Are the stocks fairly priced?
Find required returns:
A:
B:
Find alphas:
A: Alpha =
B: Alpha =