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The table shows predicted returns of three stocks in two possible scenarios: State of Economy Probability Stock A Stock B Stock C Bad 0.3 -0.15

The table shows predicted returns of three stocks in two possible scenarios:

State of Economy	Probability	Stock A	Stock B	Stock C
Bad	0.3	-0.15	-0.1	0.35
Good	0.7	0.2	0.05	0.0

a) What are the covariance and the corresponding correlation coefficient between stocks A and C?

b) Suppose you only have stock A in your portfolio and now are considering adding stock B or stock C to your portfolio. Which stock (B or C) do you think would provide better diversification effect if you include it in your portfolio with stock A?

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