The Sleepy 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

XYZ Company Expected Return Very Good 0.30 35% 21% Good 0.40 25% 16% Average 0.20 15% 9% Poor 0.10 7% 4% Expected Return 24.2% 14.9% Variance 0.003049

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

Answer: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:Answer

C) Is return of ABC Company strongly correlated with the return of XYZ Company? (2 marks)

Answer:Answer

Yes

No