Emily is considering ABC Limited and XYZ Inc. for investment of $300,000. Given the
following information:
State of ABC XYZ
Economy Probability Rate of Return Rate of Return
Boom 0.30 35% 60%
Normal 0.50 20% 0%
Bust 0.20 10% 40%
Beta 1.8 2.15
Expected T-bill rate of return = 4.5%
Assume equilibrium, i.e. expected return = required return
a. What is the expected rate of return and standard deviation for ABC? and XYZ?
b. What is the expected rate of return, and standard deviation, and Beta for the portfolio if Emily's
investment in XYZ is 50% more than his investment in ABC?
c. Given the answers to a and b, Emily should invest in ABC? or in XYZ? or in the portfolio consisting
of ABC and XYZ? (Hint: It will be useful to find the coefficients of variation).
