1. If the returns on two stocks are highly correlated, what does this mean? If they have no correlation? If they are negatively correlated?

2. Why should younger investors be willing to hold a larger amount of equity in their portfolios?

3. Use the following information on states of the economy and stock returns to calculate the expected return for Dingaling Telephone:

State of Economy Probability of State Security return in State

Recession 0.20 -7.0%

Normal 0.55 12.0%

Boom 0.25 21.0%

4. Using the information in the previous question, calculate the standard deviation of Dingalings returns. (Note: this asks for the standard deviation of a KNOWN probability distribution.)