Question 3 The following table shows a market where there are only three securities, and in the next time period one of three possible outcomes will occur. State of economy Probability Expected Returns Med Corp Low Ltd Hi Co Excellent 0.40 23.00% 9.60% Good 0.50 8.10% 6.40% Poor 0.10 -1.90% 2.40% Required: (a) Calculate the expected return for each asset separately. (4 marks) (b) Calculate the standard deviation for each asset separately. (6 marks) (c) Details of the risk and return of two shares are as follows: Expected return Standard deviation Company AC Co 14.00% 12.50% DC Corp 21.00% 18.20% The correlation between the two investments is +0.40 Suppose that an investor decides to create an investment portfolio comprising of: Share Amount ($) AC Co 87,500 DC Corp 162,500 Required: (i) Compute the expected return of the investment portfolio (2 marks) (ii) Compute the investment portfolio standard deviation. (4 marks) (iii) Discuss the concept of diversification in a portfolio. (4 marks) 1.20% 1.20% 1.20%