Stocks R and S have the following probability distributions of returns:

Returns

Probability Stock R Stock S

0.5 -2% 20%

0.1 10% 12%

0.4 15% 2%

a.) Calculate the expected return for each stock.

b.) Calculate the expected return of a portfolio consisting of 50 percent of each stock.

c.) Calculate the standard deviation of returns for each stock and for the portfolio. Which stock is considered riskier with respect to total risk?

d.) Compute the coefficient of variation for each stock. According to the coefficient of variation, which stock is considered riskier?

e.) If you added more stocks at random to the portfolio, which of the following statements most accurately describes what would happen to standard deviation p ( O~p)

(1) O~p would remain constant.

(2) O~p would decline to somewhere in the vicinity of 15 percent.

(3) O~p would decline to zero if enough stocks were included.