ABC Company is being formed to make a 1 year investment in producing and marketing presidential campaign badges. The firm requires an investment of Sh 10,000,000 of which Sh 7,500,000 will be obtained by selling debt with a 10% interest rate and the other Sh 2,500,000 will be raised by selling common shares. All cash distribution to debt holders and shareholders will be made at the end of the one year. After this year is over the value of the firm will depend primarily on which candidates make it through the primary elections. The estimated probability of distribution of the firm is:

Probability Value `000'

0.7 20,000

0.2 5,000

0.1 0

Consider the shareholders value under the three states of nature and under the expected value.

3. Four assets have the following distribution of returns.

Probability Rate of return (%)

Occurrence A B C D

0.1 10.0% 6.0% 14.0% 2.0%

0.2 10.0 8.0 12.0 6.0

0.4 10.0 10.0 10.0 9.0

0.2 10.0 12.0 8.0 15.0

0.1 10.0 14.0 6.0 20.0

REQUIRED:

a. Compute the expected return and standard deviation of each asset.

b. Compute the covariance of asset

i. A and B

ii. B and C

iii. B and D

c. Compute the correlation coefficient of the combination of assets in b above.