Suppose you have predicted the following returns for stocks ABC and XYZ in three possible states of the economy:

State Probability XYZ ABC

Boom 0.50 -5% 25%

Normal 0.30 10% 10%

Recession 0.20 12% -5%

1. Calculate the expected return on ABC.

2. Calculate the expected return on XYZ.

3. Suppose you construct a portfolio with ABC and XYZ exclusively. You allocate 40% of your investment to ABC, and 60% to XYZ. What is the expected return on the portfolio?

4. Without calculation, what kind of correlation between ABC and XYZ do you see? Is this correlation good or bad for the portfolio? Please explain.