2. Suppose that Mrs Jenny can invest all her savings in shares in Glaxy plc or all her savings in Russell plc. Alternatively she could diversify her investment between these two. There are three possible states of the economy - boom, growth or recession - and the returns of Benckiser and Resque depend on which state will occur. State of the economy Probability of state of the economy occurring Glaxy return (%) Russell return(%) Boom Growth Recession 0.4 0.4 0.2 50 30 -20 10 15 20 Required (a) Calculate the expected return, variance and standard deviation for each share. (30 Marks) (b) Calculate the expected return, variance and standard deviation for the following diversifying allocations of Mrs Jenny's savings: 50% in Glaxy, 50% in Russell (20 Marks) (c) Briefly explain how diversification impacts the trade-off of risk and return. (25 Marks) (d) What is the minimum risk (standard deviation) that we can achieve in a portfolio that contains only the two securities above? (25 Marks) (Total 100 Marks)