Imagine a given capital market where a risk-free asset with a return, rf, of 6% per period is traded. On the given capital market, the only assets traded, besides the risk-free, are stocks in firm A, firm B and firm C. Thus, no other risky assets are traded on the capital market. The price today (t = 0) of a stock in A is DKK 50. On the capital market, all participants agree that in one period (to time t = 1) there are only 4 possible states for the value of stock A, cf. table 2.1 below:
| State | Probability | Price at t= 1 in firm A |
| 1 | 0,15 | 47,00 |
| 2 | 0,15 | 44,50 |
| 3 | 0,30 | 43,50 |
| 4 | 0,40 | 45,00 |
No matter which state is realized, a dividend of DKK 10 per stock in firm A is paid in the next period (after t = 0 and before t = 1). The realized return of stock B in the next period, for the states, is given in table 2.2 below:
| State | Realized return of stock B in next period |
| 1 | -0,0700 |
| 2 | 0,1300 |
| 3 | 0,1500 |
| 4 | 0,0800 |
Calculate the expected return and the variance of the return in the next period, for firm A and B.
