Question C1 Stone PLC and Sand PLC are firms listed on the stock market. The following table shows their possible outcomes: State Probability Depression Recession Normal Boom 0.10 0.40 0.40 0.10 Return on Stone Return on Sand (%) (%) 16 -2 11 5 6 10 -3 15 (a) Calculate the expected return and the standard deviation of each security. (10 marks) (b) Compute the covariance and the correlation between the two stocks. (6 marks) (c) Calculate the expected return and the standard deviation of an equally weighted portfolio of the two stocks. (6 marks) (d) Given your findings in part (a), discuss the implications of portfolio diversification. (Word limit: 100)