You have to show your work to earn credit!

Chapter 8

1. Suppose you form a portfolio that consists of 60% investment ABC and 40% investment RST.

Economy states	Probability	rABC	rRST
1	0.1	22%	-2%
2	0.6	12%	12%
3	0.3	2%	30%

(Hints: watch Video 1 of Chapter 8 from 12:00 to 14:15 on D2L)

a) Compute the return of the portfolio in each state:

State 1 Portfolio Return:

State 2 Portfolio Return:

State 3 Portfolio Return:

b) Compute the expected return of the portfolio

c) Compute the standard deviation of the portfolio

d) Which stock has higher risk, ABC or RST? Why?