Question: 2) State Probability Return: Stock 1 Return: Stock2 Bear .25 -.020 .034 Normal .60 .138 .062 Bull .15 .218 .092 a) Calculate the covariance of

2) State Probability Return: Stock 1 Return: Stock2 Bear .25 -.020 .034 Normal .60 .138 .062 Bull .15 .218 .092 a) Calculate the covariance of return between Stock 1 and Stock 2\ b) Calculate the correlation of return between Stock 1 and Stock 2. c) If you combine Stock 1 and Stock 2 into a portfolio, will you obtain diversification benefits? Why, or why not (be sure to provide quantitative justification for your answer)? d) What is the variance of return for a portfolio that invests 40% of wealth in Stock 1 and 60% in Stock 2.

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