Consider the following possible returns on stock T, stock U, and the market portfolio over the next year:

State of the economy	Probability of the state occurring	Return on the stock T	Return on the stock U	Return on the market
Recession	0.2	-6%	20%	-5%
Normal	0.5	10%	8%	8%
Boom	0.3	18%	-20%	12%

1. what are the expected returns on the stock T, the stock U, and the market?

2. what are the standard deviations of returns on stock the T, the stock U, and the market?

3. what is the correlation between the returns on the two stocks?

4. what are the BETA's of the two stocks?

5. Calculate the Expected Return (ER) and Standard Deviation (SD) of a portfolio that is composed of 40% of T and 60% of U.

6. What do your answers in parts (b), (c), and (e) imply about diversification?

7. A broker has advised you not to invest in stock U because it has a higher standard deviation. Is the brokers advice sound for a risk-averse investor like yourself? Why or why not?