Suppose there are three states of the world, which are all equally likely, and two dierent nancialassets.In the rst state of the world, the rst asset returns 8% and the second asset returns -6%.In the second state, the rst asset returns -4% and the second asset returns 14%.In the third state,the rst asset returns 11% and the second asset returns 7%.

What is the mean return on each asset?What is the variance and standard deviation of thereturn on each asset?Use natural units, not percentages (i.e., use 0.09 instead of 9 for 9%).

What is the covariance of the returns of the two assets?What is the correlation between thetwo returns?

Consider an equal weighted portfolio of the two assets.Compute the mean return, varianceand standard deviation.

How would a mean-variance optimizing investor rank the three portfolios (asset 1, asset 2,equal weighted)?(This investor has a preferencesU(X) =E[X] (A/2)Var(X).)Does youranswer depend on the coecient of risk aversionA? Explain.