Scenario Analysis. The common stock of Escapist Films sells for $25 a share and offers the following payoffs next year:

Calculate the expected return and standard deviation of Escapist. All three scenarios are equally likely. Then calculate the expected return and standard deviation of a portfolio half invested in Escapist and half in Leaning Tower of Pita (from problem 14). Show that the portfolio standard deviation is lower than either stock’s. Explain why this happens.

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Boom Normal economy Recession Dividend Stock Price 0 $18 $1.00 26 3.00 34