1. Maximum diversification benefit can be achieved if one were to form a portfolio of two stocks whose returns had a correlation coefficient of:

1) -1.0

2) +1.0

3) 0.0

4) None of the above

2. A fruit company has 20% returns in periods of normal rainfall and -3% returns in droughts. The probability of normal rainfall is 60% and droughts 40%. What would the fruit companys expected returns be?

1) 24%

2) 10.8%

3) 0

4) cannot determine from the information given

3. Donna is considering investing in a company's stock and is aware that the return on that investment is particularly sensitive to how the economy is performing. Her analysis suggests that four states of the economy can affect the return on the investment.

		Probability		Return
Boom		0.1		25.00%
Good		0.1		15.00%
Level		0.1		10.00%
Slump		0.7		-5.00%

Use the table of returns and probabilities above to determine the expected return on Donnas investment? (Round answer to 3 decimal places, e.g. 0.076.)

Expected return

Use the table of returns and probabilities above to determine the standard deviation of the return on Donna's investment? (Round answer to 5 decimal places, e.g. 0.07680.)

Standard deviation