Suppose that Mrs Qureshi can invest all her savings in shares of Ihser plc, or all her savings in Resque plc. Alternatively she could diversify her investment between these two. There are three possible states of the economy, boom, growth or recession, and the returns on Ihser and Resque depend on which state will occur.

Required
a. Calculate the expected return, variance and standard deviation for each share.
b. Calculate the expected return, variance and standard deviation for the following diversifying allocations of Mrs Qureshi's savings:
(i) 50% in Ihser, 50% in Resque;
(ii) 10% in Ihser, 90% in Resque.

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State of the economy Probability of state of the economy occurring Ihser retun (96) Resque return Boom Growth Recession 0.3 0.4 0.3 40 30 -10 10 15 20