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The following table lists possible rates of return on Company A and B. State of the Economy Deep recession Mild recession Average Mild boom Strong
The following table lists possible rates of return on Company A and B. State of the Economy Deep recession Mild recession Average Mild boom Strong boom Probability 0.05 0.25 0.35 0.20 0.15 Company A -20% 0 10 15 30 Company B -40% 10 0 25 30 (a) Based on the above data calculate by using the appropriate formulae i. the standard deviations of returns for Company A and B ii. the covariance of returns between Company A and B 111. the correlation between Company A and B (b) If you wish to diversify risk, would it be advisable to form a portfolio of both securities A and B? State your reasons. (No computations are required to answer this part of the question.) (c) Find the minimum variance one can get by forming a portfolio of A and B. Short- selling either stock is allowed i.e., weights need not be all positive
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