You are given the following information. State of economy Probability (p) Return on AT stock (r AT ), in % Return on GD stock (rGD ), in %

Recession 0.25 -10 30 Normal 0.50 10 5 Boom 0.25 20 -25 a. Find the expected return on AT stock and GD stock. [3+3 = 6 marks] b. Find the standard deviation on AT and GD stock returns. [4+4 = 8 marks] c. Find the covariance between returns on AT and GD stocks. [4 marks] d. If you create a portfolio with 60% wealth in AT stock and remaining on GD stock, find the expected return and standard deviation of your portfolio. [4+4 =8 marks] e. Comments on standard deviation of above portfolio which is way below the average standard deviation of stocks in the portfolio. Hints: What helps to reduce portfolio risk?

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