1. You are given the following information on Stock 1, Stock 2 and on the market portfolio. The return on the riskless asset is 5%. State of Economy RI R2 RM Pr. Good Bad Crisis 38 .25 .20 6 12 .08 .14 .25 .08 .04 -.03 .15 (a) What is the correlation of return of stock 1 with stock 2? b) What is the expected rate of return and standard deviation of return on a portfolio that holds 40% of all wealth in the risk free asset and the rest of wealth in the market portfolio? 2. (a) Form an efficient portfolio based on the information in question 1 above that would generate a 50% expected return. (b) what is the standard deviation of such a portfolio