1. There are two stocks, A and B. In Fin6301, we have discussed the concept of a portfolio, which is just a basket of several stocks. Under any circumstance, if you invest 40% of your money in Stock A and the rest (60%) in Stock B, the portfolio return Rp = 40%*RA+60%*RB. Suppose the possible returns next year and the corresponding probabilities are given as follows, Possible State Probability RA RB Rp1 Rp2 of Economy Recession .3 -10% 6% Normal 10% 0% Growth .2 20% 10% Your financial advisor recommended two portfolios constructed using both stocks with portfolio P1 investing 24% in Stock A, while portfolio P2 investing 60% in Stock A. (a) What are the returns of each portfolio in each state of the economy? (b) What are the expected returns for stocks A and B, and portfolios P1 and P2, i.e., E(RA), E(RB), E(Rp1), and E(Rp2)? (c) Comparing Stock B with portfolio P1, will you be better off by holding the portfolio? (hint: also consider their volatilities) (d) Comparing Stock A with portfolio P2, does reduction in volatility justify loss in expected return when holding the portfolio