Question: Suppose a particular stock yields a rate of return of either –20 percent or +40 percent.

A. If both returns are equally likely (i.e., both have probabilities .5 of occurring), compute the stock’s expected return and the standard deviation of its return.

B. If an investor wants a portfolio risk of .1, then what proportion of her portfolio wealth should she invest the stock, and what proportion should she invest in the risk free asset with rf = .07? What will be her portfolio expected return?