QUESTION 2: The returns on shares A and B in four equally likely states at the end of next year are summarized below. 30 State Probability Rates of Rates of Return of Return of Share A Share B 0.3 -25 10.4 50 25 0.2 5 -40 0.1 40 30 a. Calculate the expected return, variance and standard deviation for each share. b. Compute the coefficient of correlation for the returns to these shares. c. Calculate the expected return, variance and standard deviation on a portfolio with 60 per cent invested in share A and 40 per cent in share B. Compute the diversifi- cation effect for this portfolio. . d. Derive the standard deviation for the return to the minimum variance portfolio and compute the diversification effect. c. Explain what factors determine the risk premium paid on any security. QUESTION 3: Assume a mean-variance opportunity set is constructed from two risky shares, A and B, with the variance covariance matrix for their returns of Share A has an expected return of 25 per cent and share B an expected return of 15 per cent. (0.0064 0 0 0.0016) Suppose investor I chooses a 'market portfolio' which consists of 80 per cent in share A and 20 per cent in share B, whereas investor J chooses a different 'market portfolio with 50 per cent in each share. Calculate the beta coefficient (BA) of share A for each investor. Explain why they differ