Consider the possible rates of return that you might earn next year on a RM50,000 investment in stock A or on a RM50,000 investment in stock B, depending upon the states of economy: recession, normal and prosperity.

State of Economy

Stock A

Stock B

Return (ri)

Probability (pi)

Return (ri)

Probability (pi)

Recession

-5%

0.2

10%

0.2

Normal

20%

0.6

15%

0.6

Prosperity

40%

0.2

20%

0.2

Required:

1. Compute the expected rate of return () for both stocks, A and B
2. Compute the standard deviation, for both stocks, A and B
3. Compute the Covariance, AB and Correlation, AB