Question 3 (20 marks)

Stocks X and Y have the following probability distributions of expected future returns:

Probability 0.15 0.35 0.30 0.20

Expected return

Standard deviation Correlation between Stock X and Stock Y

i. Calculate the expected return for each stock. marks)

Stock X -5%

7% 15% 10%

Stock Y -8%

10% 18% 25%

ii. Calculate the standard deviation of returns for Stock Y. marks)

(4

iii. You have $2,000. You decide to put $500 of your money in Stock X and the rest in Stock Y. Calculate the expected return of your portfolio. (5 marks)

iv. Calculate the standard deviation of your portfolio based on the weight of Stocks X and Y stated in part (iii). (6 marks)