12) The investment manager of Babson Securities is studying the relationship of stock A to stock B. Given the various states of the economy, the…

12) The investment manager of Babson Securities is studying the relationship of stock A to stock B. Given the various states of the economy, the expected returns for each stock are shown below. Each state of the economy has an equal chance of occurring. What is the covariance of the returns on these two stocks? Economic Expected Expected State Return on A Return on B Boom .143 .160 Normal .085 .132 Recession -.034 -.065 Depression -.092 -.240 [ ] .008023 [ ] .011419 v [ ] .014680 [ ] .016071 [ ] .017414 13) What is the beta of a portfolio that is invested 25 percent in the market portfolio, 25 percent in an asset with twice as much systematic risk as the market portfolio, and the rest in a risk-free asset? [ ] 0.25 [ ] 0.50 v [ ] 0.75 [ ] 1.00 [ ] 1.25 14) Which of the following statements is correct concerning the security market line (SML)? I. An asset that has a return located above the SML, given the asset”s beta, is overpriced.

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