Stock a Is Expected to Return 14 Percent in a Normal

question 16

Multiple Choice

Stock A is expected to return 14 percent in a normal economy and lose 21 percent in a recession.Stock B deals with inferior goods and has expected returns of 6 percent in a normal economy and 15 percent in a recession.The probability of a recession occurring is 25 percent with a zero probability of a boom.What is the standard deviation of a portfolio that is equally weighted between the two stocks?

• A)5)63%
• B)6)08%
• C)4)29%
• D)5)13%
• E)6)36%