Lajuna Ltd, a large foreign mutual fund, is considering investing in stocks on Bursa Malaysia. One of the portfolio managers, Mr Ben, has identified two stocks, Suria and Delia, which have great potential and are considered as blue-chip stocks. As a new investor in the local market, Mr Ben approached you to advise him on which one of the stocks should be selected. He provides you with the following information for analysis.

State of economy	Probability of outcome	Return on Suria	Return on Delia
I	0.35	0.19	0.31
II	0.40	0.28	0.24
III	0.25	0.23	0.17

Required:

1. Calculate the expected return and standard deviation for both stocks. Advise Mr Ben on the investment he should choose.

(8 marks)

(CLO2:PLO6:C5)

2. Calculate the covariance and the correlation between the two stocks. Analyse from result.

(5 marks)

(CLO2:PLO6:C6)

3. If the firm decided to invest RM400,000 in Suria and RM200,000 in Delia, calculate the expected return and standard deviation of a portfolio.

(8 marks)

(CLO2:PLO6:C5)

4. Assess your findings from (a) and (c).

(4 marks)

(CLO2:PLO6:C5)