7. PORTFOLIO RISK Consider the following two assets: X and Y The returns on these two assets depend on the movement of the price of gold. Define State 1 as the price of gold increases and State 2 as the price of gold decreases The returns to the project are tabulated below: The probability of an increase in gold price is 0.6 while the probability of a decrease in gold price is 0.4. State 1 State 2 50% 0% 20% 4% XX Y a. Calculate E(X) and E(Y). b. Calculate V(X) and V(Y) c. Calculate Cov(X,Y) and Cor(X,Y). Interpret what this number means. d. Consider the following portfolio that holds 80% of X and 20% of Y. What are the expected return and the risk of this portfolio? e. Suppose the rate of return of the market portfolio is 10%, and risk free return is 5%. Calculate the risk premium, the betas of the two shares and the beta of the portfolio defined in part d.

PORTFOLIO RISK Consider the following two assets: X and Y The returns on these two assets depend on the movement of the price of gold. Define State 1 as the price of gold increases and State 2 as the price of gold decreases The returns to the project are tabulated below: The probability of an increase in gold price is 0.6 while the probability of a decrease in gold price is 0.4 . a. Calculate E(X) and E(Y). b. Calculate V(X) and V(Y) c. Calculate Cov(X,Y) and Cor(X,Y). Interpret what this number means. d. Consider the following portfolio that holds 80% of X and 20% of Y. What are the expected return and the risk of this portfolio? e. Suppose the rate of return of the market portfolio is 10%, and risk free return is 5%. Calculate the risk premium, the betas of the two shares and the beta of the portfolio defined in part d