You are considering the following two stocks to form a portfolio: STK and VZN. The beginning-of-year price of STK is $50 and the price of VZN is $40. Their dividend payments and end-of-year prices depend on the market condition by the end of the year. The current risk-free rate is 2%. Market Condition Bull Bear Probability 0.6 0.4 STK Stock Price Dividend $5 $70 $3 $42 VZN Stock Price Dividend $2 $34 $4 $50 (a). Calculate the expected return on STK and VZN. (b). Calculate the variance and standard deviation of STK and VZN.

(c). Suppose you short $10,000 of VZN and use the proceeds along with your own $5,000 to purchase STK. What is the expected return on your portfolio? What is the standard deviation? (d). What proportion of your wealth should you invest in each of these two stocks such that your portfolio is the minimum variance portfolio? What is the expected return on your portfolio? What is the standard deviation?