Use the following information to answer the next 8 questions. Suppose that you project cash flows for two potential investments, call them Investment A and Investment B, and you find that there are three distinctly identifiable scenarios: Probability Return A Return B Bad State 20% -5% 19% Status Quo 45% 17% 12% Good State 35% 28% 6% You may find these formulas useful (apologies for formatting - Proctor is horrible): Expected Return on Asset=P1 x R1 + P2 x R2 + ... + PN X RN (where P1 is probability of state 1 and R1 is return in state 1) St Dev of Asset = {P1 x (R1 - E[R])^2 + P2 x (R2 - E[R])^2 + ... ]^1/2 Covariance = P1 x (RA, 1 - E[RA]) > (RB,1 - E[RB]) + P2 x (RA,2 - E[RA]) > (RB 2 - E[RB]) + ... (where RA, 1 is return on asset A in state 1, etc.) Expected Return Portfolio WAX E[RA] + WB x E[RB] x... (where WA is the weight in asset A) St Dev of Portfolio = WA^2 x (st dev A)^2 + WB^2 x (st dev B)^2 + 2 x WAX WB x covar(A,B) Question 15 3 nt What is the expected return for Investment A? 12.63% 0 14.52% 16.45% 18.27% 0 20.87% Question 16 What is the standard deviation of returns for Investment A? O 11.78% O 12.96% O 13.65% O 14.83% 16.17% What is the expected return for Investment B? O 11.30% O 13.24% O 15.16% 16.92% 18.68% D Question 18 What is the standard deviation of returns for Investment B? O 2.95% 0 4.68% 6.17% 0 7.77% O 9.34% If we invest 50% of our money in Investment A and 50% of our money in Investment B, what woul be the expected return on that portfolio? 9.34% 0 10.52% O 12.13% O 13.88% O 15.41% Question 20 4p What is the covariance of returns for Investment A and Investment B? 0 -0.0216 -0.0097 0 -0.0054 O 0.0023 O 0.0088