XYZ Corporation is evaluating 2 mutually exclusive projects which have the following probability distribution and returns: Good Market Bad Market Probability 60% 40% Return on Project A (000s) 70 15 Return on Project B (000s) 80 20 1) Calculate and comment upon the expected return and standard deviation of Project A and Project B. [15] 2) Suppose now XYZ wants to invest only in Project B and the initial investment is 50,000. The outcomes shown in the table above represent the expected cash flows at the end of the first year of the project's life. If the market shows a pessimistic response to the project in the first year, XYZ presents the following probability distribution and cash flows at the end of the second year: Probability 70% Return (000s) 15 Outcome Project generates insufficient revenues Project does not generates revenues 30% 0 However, if the market shows an optimistic response to the project in the first year, XYZ presents rather the following probability distribution and cash flows at the end of the second year: Outcome Project generates high revenues Project generates sufficient revenues Project generates low revenues Probability 20% 70% 10% Return (000s) 100 70 10 Calculate the expected NPV of Project B assuming an opportunity cost of capital of 10%. [20] 3) Assuming that XYZ have 200,000 to invest in the stock market. The manager has decided to invest 100,000 in stock A and the remainder in stock B. And he has the following information: Bear Market Normal Market Bull Market Probability 0.3 0.5 0.2 Return on Stock A -10% 0% 40% Return on Stock B 5% 50% -5% Calculate and comment upon the expected return and standard deviation of your portfolio if the correlation between A and B is 0.5. [15]