The common stock of Escapist Films sells for $40 a share and offers the following payoffs next year:

	Probability	Dividend	Stock Price
Boom	0.3	$0	$19
Normal economy	0.5	3	50
Recession	0.2	6	45

Calculate the expected return and standard deviation of Escapist. (Do not round your intermediate calculations and round your final answers to 2 decimal places. Use the minus sign for negative numbers if it is necessary.)

Expected rate of return %
Standard deviation %

The common stock of Leaning Tower of Pita, Inc., a restaurant chain, will generate the following payoffs to investors next year:

	Probability	Dividend	Stock Price
Boom	0.3	$5	$199
Normal economy	0.5	3	115
Recession	0.2	0	0

The stock is selling today for $94.

Calculate the expected return and standard deviation of a portfolio half invested in Escapist and half in Leaning Tower of Pita. (Do not round your intermediate calculations and round your final answers to 2 decimal places. Use the minus sign for negative numbers if it is necessary.)

Expected return of portfolio %
Standard deviation of portfolio %

Why is the portfolio standard deviation lower than for either stocks individually? The portfolio standard deviation is lower than for either stocks individually because

a. the variations in the returns of the two firms serve to offset each other.

b. investing in portfolio of two shares is always less risky than buing only one of that shares.

c. both the stocks have positive excpected return.