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In a particular market, the following assumptions apply: Possibilities Probability of outcome Market returns Yield on securities 1 Yield on securities 2 1 10% 5%

In a particular market, the following assumptions apply:

Possibilities Probability of outcome Market returns Yield on securities 1 Yield on securities 2
1 10% 5% 14% 10%
2 30% 7% 15% 8%
3 50% 10% 16% 6%
4 10% 20% 23% 3%

a) What is the expected return and standard deviation of each security?

b) What is the covariance between the market and securities 1 and 2?

c) What is the correlation between the market and securities 1 and 2?

d) What is the expected return and standard deviation of a portfolio that has 50% of holdings in securities 1 and 50% in securities 2?

e) What is the expected return and standard deviation of a portfolio that has 10% holdings in securities 1 and 90% in securities 2?

f) What is the expected return and standard deviation of a portfolio that has 90% holdings in securities 1 and 10% in securities 2?

g) What do the results from the above points indicate regarding risk diversification?

h) Calculate the beta () for securities 1 and 2 based on the stated assumptions.

i) Draw the result for these two properties, if possible.

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