1a-Cisco has a current stock price of $40 per share. Suppose that Cisco's stock price a week from today will be either $42 or $32. The probability that Cisco's stock price will increase to $42 is 0.25 (so that the probability of a decrease to $32 is 0.75). Cisco will not pay a dividend in the next week. Which of the following is the correct expected return and standard deviation of returns on Cisco stock over the next week?

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Expected Return = -13.75%; Standard Deviation = 11%

Suppose that you set up a portfolio of Cisco stock and Wells Fargo stock in which the weights on each stock are 0.5 (i.e., you have evenly split your investment between the two stocks). In addition, suppose that the variance of the returns on Cisco stock is 10 and the variance of returns on Wells Fargo stock is 8. The covariance of the returns on the two stocks is 2. What is the variance of the returns on your portfolio?

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5.5

10

9

5

Expected Return = -13.75%; Standard Deviation = 117%

Expected Return = -7.5%; Standard Deviation = 11%

Expected Return = -7.5%; Standard Deviation = 117%

1b- Suppose you would like to put together a portfolio that consists of Cisco stock and Wells Fargo stock. The standard deviation of the returns on this portfolio will be larger if

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The returns on Cisco and Wells Fargo stock are positively correlated.

The returns on Cisco and Wells Fargo stock are negatively correlated.