Question

2. Carry all calculations to 4 digits (4 digit accuracy)

State	Probability	Return: Stock A	Return: Stock B
Bear	.25	-.02	.05
Normal	.50	.14	.16
Bull	.25	.28	.10

1. Calculate the expected return for each stock

2. Calculate the variance of return for each stock

3. Calculate the covariance of return between Stock A and Stock B.

4. If you combine the stocks into a portfolio, will you obtain diversification benefits? Why, or why not (be sure to provide quantitative justification for your answer)?

5. What is the variance of return for a portfolio that invests 50% of wealth in Stock 1 and 50% in Stock 2.

Answer 1