Microsoft Word - HW1

You have estimated the returns of 2 companies for the next year depending on the general economic condition.

Outcome	Probability	Company 1	Company 2
Boom	30%	15%	5%
Normal	50%	5%	0
Recession	20%	0%	10%

1. (a) Calculate the expected return and standard deviation of the returns of each company.
2. (b) Calculate the covariance and correlation between the returns of these 2 companies.
3. (c) Lets combine these 2 companies 50%-50% in portfolio P. Calculate the expected return and the standard deviation of the portfolio P.
4. (d) Using mean-variance criterion, does any of the 3 investments, company 1, company 2, and portfolio P, dominate the other one?