Consider the following probability distribution for stocks A and B:

State Probability Return on Stock A Return on Stock B

1 0.30 10% 8%

2 0.30 13% 7%

3 0.40 12% 6%

a) What is the standard deviation of this risky portfolio?

b) What are the expected rates of return of stocks A and B?

c) What are the standard deviations of stocks A and B?

d) What is the coefficient of correlation between A and B if the covariance is -0.000063?

e) If you were to use only the two risky funds and still require an expected return of 10%, what would be the investment proportions of your portfolio?