2. An Australian investor invests C$3mi in stock X and C$2mi in stock Y.

State of Economy Probability Return (X) Return (Y) Change in Exchange Rate (%)

Boom 0.5 30% -5% 17%

Normal 0.3 15% 10% 10%

Recession 0.2 -10% 25% -5%

a) Calculate the return and risk for this portfolio in foreign term. Also calculate the correlation between the 2 stock returns.

b) Calculate the return and risk for this portfolio in domestic term.