a.1) Calculate the expected return, standard deviation of X and Y, and the covariance between X and Y.

a.2) Suppose that all risky assets in the market are correctly priced (no mispricing), Calculate the beta coefficients of X and Y.

a.3) An investor wants to invest 35% of her initial wealth in X and 65% in Y. What is her portfolios expected return, standard deviation and beta?

a.4) Calculate the expected return of a portfolio P on the CML which has the same total risk as that of the portfolio in a.3). What are the proportions of risk free asset and the market portfolio included in P?

a) Consider two risky common stocks issued by two companies X and Y. The correlation between two stocks is 0.943. The probability distributions of the returns are given by the table below. State of Economy Probability R(X) R(Y) Growth 65% 8.0% 18.0% Stagnation 25% 6.5% 8.0% Recession 10% 0.0% -5.0% A 3-month Treasury Bill with AAA credit rating offers a yield of 1.5% per annum. The market index of all shares in the UK has an expected return of 8.0% with standard deviation 3.5%