1. An investor invests $2.5mi in stock A and $5mi in stock B.

State of Economy Probability Return (A) Return (B)

Boom .25 20% 5%

Normal .50 10% 10%

Bust .25 0% 15%

a.) Calculate the expected return and variance for each stock.

b.) Calculate the covariance and correlation between the 2 stock returns.

c.) Calculate the portfolio's return and variance.