Consider the following situation: State of Economy Probabilityof State of Economy Returns if State Occurs Stock A Stock B Stock CBoom 20% 25% 10% 5% Recession 80% -30% 5% 10% The expected returnon the market portfolio is 7% and the US Treasury bill yields 3%.The capital market is currently in equilibrium.
(a) (5 points) Which stock has the most systematic risk? Provideall the steps and equations.
(b) (5 points) Which stock has the most unsystematic risk?Explain why. Provide all the steps and equations.
(c) (10 points) What is the standard deviation of a portfoliowhich is comprised of $8,400 invested in stock A, $3,600 in stockB, and $8,000 in stock C?
(d) (5 points) If the expected inflation rate is 2.5%, what isthe exact expected real return on the portfolio of part (c)?
