The Jones Company is looking to make an investment in some shares and other investments to diversify their portfolio.

They are interested in the following two stocks and have been able to determine their expected returns based on the expected different states of the economy.

State of Economy	Probability	ABC Company Expected Return	DEF Company Expected Return
Very Good	0.20	40%	38%
Good	0.20	30%	24%
Average	0.30	20%	8%
Poor	0.30	10%	5%
Expected Return		23.00%	16.30%
Variance			0.016501

A) Calculate the variance of the returns of ABC Company. (3 Marks) Please provide your answer as a decimal to 6 decimal places.

Answer:

B) Calculate the covariance of the expected returns of ABC Company and XYZ Company. (3 Marks) Please provide your answer as a decimal to 6 decimal places.

Answer:

C) For two stocks when added to a portfolio to have diversification benefits the correlation coefficient between the stocks must be negative. (2 marks)

Answer: