Problem 1 uppose you are given the following information for two stocks, A and B Probability of Occurrence 0.1 0.2 0.5 0.2 State of the Economy Expected Return on Expected Return on Stock A in This State Stock B in This State High growth Moderate growth No growth Recession 60% 20% 0% 25% 5% 25% 5% 0% a) b) c) Calculate the expected return of each stock Calculate the standard deviation (SD) of each stock Calculate the weights and expected return for a portfolio that has $600 invested in stock A and $1,400 invested in stock B d) Calculate the portfolio standard deviations assuming that the correlation between the returns of A and B is: iv. 1 In the light of your answers in part (d) above, describe how a change in the degree of correlation affect the portfolio standard deviation? Which particular correlation gives the lowest portfolio standard deviation? e) Given correlation of -1, what portfolio weights will reduce the portfolio standard deviation to zero? Show calculations to support your answer. f) Calculate the weighted average of the standard deviations of individual stocks A and B; and show that each portfolio standard deviation is less than this weighted average except the portfolio standard deviation with correlation of 1. g)