Problem 1 Consider the following information about three stocks: Rate of Return if State Occurs State of Economy Probability of State of Economy Stock A Stock B Stock C Boom 0.2 40% 15% 7% Average Poor Recession 0.3 15% 30% 7% 0.3 5% -5% 7% 0.2 -20% 5% 7% Your portfolio manager has invested 30% of your money in Stock A, 50% in Stock B, and 20% in Stock C. a) What is the expected return of your portfolio? b) What is the covariance between Stocks A and B? c) What is the correlation coefficient between Stocks B and C? d) What is the standard deviation of your portfolio? Hint: Instead of using the portfolio variance formula for three stocks, you can save time by calculating the return on the portfolio for all four states of the economy, and then calculate the standard deviation of these portfolio returns.