You are thinking about investing your money in the stock market. You have the following two stocks in mind: stock A and stock B. You know that the economy can either go in recession or it will boom. You also know the following about your two stocks:

State of the Economy	Probability	RA	RB
Boom	40%	10%	2%
Recession	60%	6%	15%

You also have information that the correlation between the two stocks as -0.6

Note: Both Questions are related to the above table.

Required

Question

1. Calculate the expected return for stock A and stock B.

(10 Marks)

2. Calculate the risk for stock A and for stock B.

(20 Marks)

3. Based on the expected return and risk calculated in from the previous two questions, calculate Coefficient of Variation (CV) of both stocks and determine which of the two stocks would be the better investment.

(20 Marks)

4. Calculate the expected return on a portfolio consisting of equal proportions in both stocks.

(10 Marks)

5. Calculate the expected return on a portfolio consisting of 20,000 units invested in stock A and

30,000 units in stock B.

(20 Marks)

6. Calculate the standard deviation of the portfolio with equal proportions in both stocks. (20 Marks)