Stock A

Probability of outcome	Return
.2	.04
.3	.01
.1	.08
.4	.05

Stock B

Probability of outcome	Return
.15	.02
.25	.04
.3	.03
.3	.03

(a) Calculate the expected return and variance for these three stocks and interpret the relationship between stock return and variance.

(b) You want to form a portfolio consisting of 100 shares of each of two stocks above, and the stock price for Stock A and B is $60/share and $80/share.

(i) What is the expected return of your portfolio?

(ii) Do you expect the overall risk increase or decrease, and why (you dont need to calculate the portfolio variance).

Include work