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What is the expected return and standard deviation

State of the economy Probability End of Period Return

Stock A Stock B

Good 0.3 20% 21%

Average 0.5 16% 15%

Bad 0.2 11% 7%

Question 1- What are the expected return and standard deviation of the returns on stocks A and B?

Question 2- What is the expected return and standard deviation of a portfolio of 20% in A and 80% in B?

Question 3- What is the expected return and standard deviation of a portfolio with 80% in A 4- Which one of the two portfolios should be selected by a risk averse investor? Why?

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## Q : Estimate the cost of common equity

Why are several formulas often used to estimate the cost of common equity instead of the "right" formula?