Problem 1 (28 MARKS) As part of an investment team at a large Canadian investment company, you are analyzing the returns of two stocks: MFC and BCE. You consider five possible scenarios for the stocks' returns depending on how good the economy will be over the coming year. MFC has a 0.9 correlation with the market portfolio. BCE has a 0.5 correlation with the market portfolio. The market portfolio has a standard deviation of 10%. The risk-free rate is equal to 2%. Economy scenario Boom Above average Average Below average Recession Expected Return Standard Deviation Probability 0.3 0.2 0.2 0.2 0.1 Return on MFC 30% 20% 10% 0% -20% ?? 15.52% Return on BCE 8% 8% 10% 12% 15% 9.9% ?? a) Calculate the expected returns for stock MFC. (2 marks) b) Calculate the standard deviation for BCE stock. (4 marks) c) Calculate the correlation between the two stocks. (5 marks) d) Assume you have a portfolio with $10,000 invested in MFC and $25,000 invested in BCE. Calculate the expected return and standard deviation of returns for this portfolio. (9 marks) e) Calculate the beta of each stock? (4 marks) f) What is the beta of your portfolio in (d)? (2 marks) g) Suppose the return on Government of Canada T-Bills = 2% and the return on the market portfolio is 6%, what is your required return of your portfolio in (d)? (2 Marks)