QUESTION 7 One of the major risks in the economy is the oil price. Many financial assets are severely affected by the oil price. Consider a natural gas company and an automobile company. The natural gas company will be hit by a low oil price because the demand for natural gas will decrease as oil becomes cheaper. But the automobile company will benefit from a low oil price as more people can afford the cost of driving a car. The probability of the oil price next year is given by the following table: Oil price Probability drops 25% does not change 50% arises 25% Contingent on the change in the oil price next year, the annual returns to the companies are expected as follows: If oil price Natural gas Automobile drops -8% 18% does not change 6% 4% arises 12% -10% You are planning to invest 30% of your investment in the natural gas company and the remaining in the automobile company. What is the variance of your portfolio? O a. 5.88 O b. 42.48 O C. 23.48 O d. 16.08 O e. 10.32