9. Use the following probability distribution. Scenario Probability Stock X Stock Y Boom .3 4% 20% Normal .5 8% 12% Recession .2 10% -5%

a) Find the expected rate of return on Stock X. (3 pts)

b) Find the expected rate of return on Stock Y. (3 pts)

c) Find the standard deviation of Stock X. (3 pts)

d) Find the standard deviation of Stock Y. (3 pts)

e) Find the covariance between Stock X and Stock Y. (3 pts)

Suppose that you construct a two-stock portfolio as follows: Investment Stock X $1,000 Stock Y $3,000

f) Find the portfolios expected rate of return. (3 pts)

g) Find the portfolios standard deviation. (3 pts)

h) Compare standard deviations of Stock X, Stock Y, and your portfolio.

Explain your portfolios risk in terms of diversification. (3 pts)