1.Calculate the expected return, variance of returns, standard deviation of returns, and coefficient of variation for the following stock. Use at least five decimal places in computation of the variance to avoid significant rounding errors.

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State of EconomyProbabilityReturn

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Boom0.100.30 (or 30%)

Good0.200.25 (or 25%)

Average0.500.12 (or 12%)

Recession0.10-0.10 (or -10%)

Depression0.10-0.20 (or -20%)

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2.You are considering an investment in Stock A and Stock B. Your security analyst has estimated thereturns on these two stocks as follows:

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State ofProbability ofReturn onReturn on

EconomyState OccurringStock AStock B

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Bust0.10-0.10 (or -10%)0.05 (or 5%)

Normal0.600.15 (or 15%)0.10 (or 10%)

Boom0.300.25 (or 25%)0.40 (or 40%)

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a)Find the expected return oneach stock.

Use at least six decimal places when computing (b), (c), and (d) below to minimize rounding errors.

b)Compute the variance and standard deviation of returns ofeach stock.

c)Find the covariance and correlation between the returns on Stock A and Stock B.

d)Assume that you form a portfolio consisting of Stock A and Stock B.You invest $3,000

in Stock A and $7,000 in Stock B.

i)Find the weight ofeach stockin the portfolio.

ii)Find the expected returnandstandard deviation of returns on the portfolio

consisting of Stock A and Stock B.