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You have the following information: State of economy Probability Returns of Stock A Returns of Stock B I 30% 6% 20% II 40% 18% 15%

You have the following information:

State of economy

Probability

Returns of Stock A

Returns of Stock B

I

30%

6%

20%

II

40%

18%

15%

III

30%

28%

35%

You are a risk analyst of an investment bank. You have been asked to perform the following calculations:

(a) Calculate: expected return and standard deviation of stock A and B.

(b) Calculate the covariance and correlation coefficient between stock A and B.

(c) How would you construct a portfolio to generate 21% expected return? Calculate the weight (proportion) of stock A and B in your portfo

Probability

Return of A

Total Return

Probability

Return of B

Total Return

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