Question 3

Mr. Eric can invest in HBC stock or YMZ stock. His projection of the returns on these two stocks is as follows:

State	Probability	Return on HBC (%)	Return on YMZ (%)
Bust	0.25	-3.0	2.0
Normal	0.60	9.2	12.0
Boom	0.15	18.4	8.0

Required:

1. Calculate the expected return of each stock
2. Calculate the standard deviation of return of each stock
3. Calculate the expected return on the portfolio if Mr. Eric invested 50% in HBC and 50% in YMZ.
4. Calculate the standard deviation on the portfolio.