Question: 2) Scenario Analysis. Consider the following scenario analysis for two risky assets: Stock P and Stock Q Bear Market Normal Market Bull Market Probability 0.3

2) Scenario Analysis. Consider the following scenario analysis for two risky assets: Stock P and Stock Q Bear Market Normal Market Bull Market Probability 0.3 0.4 0.3 Stock P -20% 18% 40% Stock Q) 8% 12% -15% a. What are the expected rates of return for stocks P and Q? What are the variances and standard deviations of returns on Stocks P and Q? Provide full details of your calculations. [6 Marks] b. Assume you invest $5,000 in Stock P and $5,000 in Stock Q, what is the expected return on your portfolio? What is the standard deviation of the portfolio return? Provide full details of your calculations. [5 Marks] c. Consider your answers for part (a) and part (b), briefly explain how diversification reduces risk. [4 Marks]

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