Problem 2 - Risk & Return (45 marks)

Assume you think a boom and a recession are equally likely to happen, a 50-50 chance of either.

State of Economy	Probability of State of Economy	Security Returns if State Occurs
		Security L	Security U
Recession	0.50	-20%	30%
Boom	0.50	70%	10%

Notice that stock U earns 30% if there is a recession and 10% if there is a boom. Based on the above information:

a. What is expected return on stock U? (5 marks)

b. What is expected return on stock L? (5 marks)

c. What is a standard deviation for stock U? (5 marks)

d. What is a standard deviation for stock L? (5 marks)

Assume that your group project team invested $7,000 in security L and $3,000 in security U.

e. What is portfolio return in Recession? (5 marks)

f. What is portfolio return in Boom? (5 marks)

g. What is expected return of the portfolio? (5 marks)

h. What is variance of the portfolio? (5 marks)

i. What is standard deviation of the portfolio? (5 marks)