An equity analyst is considering investing in two listed companies in Bursa Malaysia, Eco Berhad (Eco) and Sky Berhad (Sky). The expected returns on each of these two investments vary depending on economic conditions. The following table shows the expected returns and the likelihood of the economic conditions.

a) Based on the above, compute the followings: i) The expected return for Eco and Sky; ii) The standard deviation for Eco and Sky; iii) The correlation between Eco and Sky. b) Calculate portfolio risk and return based on following combination: i) 70% invested in Eco, 30% in Sky; ii) 50% invested in Eco, 50% in Sky; iii) 30% invested in Eco, 70% in Sky.

c) Based on your response above, explain what has happened to the rate of return and risk when moving from individual shares to a portfolio.

\begin{tabular}{|c|c|c|c|} \hline Economic conditions & Probability & Eco returns (\%) & Sky returns (\%) \\ \hline Recession & 30% & 5 & (5) \\ \hline Normal & 55% & 12 & 18 \\ \hline Boom & 15% & 16 & 28 \\ \hline \end{tabular}