QUESTION FOUR

Economic State	Probability	Returns: Stock X	Returns: Stock Y
Recession	0.2	5%	7%
Normal	0.6	15%	14%
Boom	0.2	25%	21%

Required

1. Compute the Holding Period Return [HPR] of stock Y for the scenario of a recession. (2 marks)

2. Calculate the correlation coefficient of the above two stocks. (15 marks)

3. Given that the Treasury Bill return is 5%, construct the Security Market Line (SML) and clearly label the above two stocks. (3 marks)

[TOTAL: 20 MARKS