Question 1: Consider the following probability distribution of returns of stock X and stock Y: State of Economy Probability Recession 0.2 Normal 0.3 Boom 0.5 Corr(X, Y)=0.5 Return on Stock X (%) -15% Return on Stock Y (%) -10% 20% 30% 50% 15% a) Calculate expected Return and Standard Deviation of Return for each stock. b) An investor invests 30% of her money in stock X and remaining in stock Y. Calculate: i) Portfolio Expected Return i Portfolio Variance and Standard Deviation of Return c) Without doing any further calculations, explain whether the risk averse investor will be better off/worse off from a risk-return perspective in each of the following cases: Corr(X, Y) = -0.5 i) ii) iii) Corr(X, Y)=-1 Corr(X, Y) = +1 d) Now, assume that Corr (X, Y) = -1. Choose weights for stock X and Y to get minimum standard deviation portfolio. (Hint: No calculus is necessary).