1) Stuart Company's manager believes that economic conditions during the next year will be strong, normal, or weak, and she thinks that the firm's returns will have the probability distribution shown below. What's the standard deviation of the estimated returns? (Hint: Use the formula for the standard deviation of a population, not a sample.) Economic Conditions Prob. Return Strong 30% 24.75% Normal 40% 10.00% Weak 30% 16.00% Select the correct answer.

a. 15.53% b. 16.03% c. 15.78% d. 16.28% e. 15.28%

2) Assume that your cousin holds just one stock, Eastman Chemical Bonding (ECB), which he thinks has very little risk. You agree that the stock is relatively safe, but you want to demonstrate that his risk would be even lower if he were more diversified. You obtain the following returns data for Wilder's Creations and Buildings (WCB). Both companies have had less variability than most other stocks over the past 5 years. Measured by the standard deviation of returns, by how much would your cousin's risk have been reduced if he had held a portfolio consisting of 60% in ECB and the remainder in WCB? (Hint: Use the sample standard deviation formula.)

	Year	ECB	WCB
	2011	40.00%	40.00%
	2012	-10.00%	15.00%
	2013	35.00%	-5.00%
	2014	-5.00%	-10.00%
	2015	15.00%	35.00%
Average return =		15.00%	15.00%
Standard deviation =		22.64%	22.64%

Select the correct answer.

a. 3.76%

b. 3.80%

c. 3.88%

d. 3.84%

e. 3.92%