Question 4: Introduction to Risk and Return (25 marks) (i). Suppose you have $20,000 to invest in two securities: Spot and Dot. After you have done an extensive analysis of the economy and the two securities, you have the following forecasts: State of the Probability of Economy Spot Expected Return -6% Dot Expected Return Occurrence 15% 35% oom 60% Normal 12% 20% 25% 18% -10% Bust (5 marks) (6 marks) (3 marks) (3 marks) a) What are the expected returns of Spot and Dot shares? b) What are the standard deviations of the returns on Spot and Dot? c) Estimate the covariance of the returns on Spot and Dot d) What is the correlation coefficient between Spot and Dot returns? e) What is the composition of the portfolio (weight of Spot and Dot) if you wish to have an expected return of 12 percent on the portfolio? f) Compute the standard deviation of the portfolio (in (e)) (5 marks) (3 marks) Question 4: Introduction to Risk and Return (25 marks) (i). Suppose you have $20,000 to invest in two securities: Spot and Dot. After you have done an extensive analysis of the economy and the two securities, you have the following forecasts: State of the Probability of Economy Spot Expected Return -6% Dot Expected Return Occurrence 15% 35% oom 60% Normal 12% 20% 25% 18% -10% Bust (5 marks) (6 marks) (3 marks) (3 marks) a) What are the expected returns of Spot and Dot shares? b) What are the standard deviations of the returns on Spot and Dot? c) Estimate the covariance of the returns on Spot and Dot d) What is the correlation coefficient between Spot and Dot returns? e) What is the composition of the portfolio (weight of Spot and Dot) if you wish to have an expected return of 12 percent on the portfolio? f) Compute the standard deviation of the portfolio (in (e))