The following table represents your assessment of the probabilities of boom and depression next year and of the returns the two stocks will have.

Economic Probability Return of stocks

conditions ABC XYZ

Boom .4 30% 10%

Depression .6 -10% 5%

Expected Return ? 7%

Risk 19.6% ?

a) Compute the expected return when you invest in only ABC stock. (2 points)

b) Compute the risk when you invest in only XYZ stock. (2 points)

c) Compute the risk when you invest 80% in ABC stock and 20% in XYZ stock. (5 points)