he annual rate of return and related probabilities given below summarise your analysis for two securities. Security A

Security B

Rate of Return

Probability

Rate of Return

Probability

10%

45%

5%

30%

14%

35%

15%

30%

18%

20%

25%

40%

Required:

a. Calculate the expected rate of return, E(R), for each security. (2 marks)

b. Calculate the standard deviation, , for each security. (3 marks)

c. Which security should you purchase? Explain why you make such choice. (2 marks)

d. Imagine that you will make a portfolio that consists of 30% of Security A and 70% of Security B, assuming the covariance between A and B (A,B) is -0.0026. Based on the answer you obtain from a) and b), calculate the expected return, E(RP), and standard deviation, P, of your portfolio. (5 marks)