Suppose you are considering investing an equal proportion of your wealth in two stocks.Stock C offers a 15% return while stock T offers a 25% return assuming a boom economy occurs for which there is a 30% chance of this occurring. If a normal state of the economy occurs, Stock C offers a 10% return while stock T offers a 20% return. There is a 50% chance of a normal economy.Finally, if a recession occurs, Stock C will offer a 2% return while stock T will offer only a 1% return.There is a 20% chance of a recessionary economy.

1.Compute the expected return on your 2-asset portfolio.

2.Compute the standard deviation of your 2-asset portfolio.

3.Now assume that in addition to holding Stocks C and T as part of your portfolio, you decide to add Stock R to your portfolio.You will again invest an equal proportion of your wealth among each stock.Using the same probabilities of state outcomes and returns previously made for Stocks C and T, recompute the expected return and standard deviation on your portfolio under the assumption that Stock R will offer a -5% return in a boom economy, a 1% return in a normal economy, and a 15% return in a recessionary economy.

4.What conclusion about the standard deviation can be made from your results above as you shift from a 2-asset portfolio to a 3-asset portfolio of uncorrelated assets?

5.Will you be able to eliminate your level of risk by diversifying among more and more uncorrelated assets to your portfolio?Explain.