Question: 4. Calculate the expected return for each security given the information below: State of the Economy Probability of Occurrence Expected return on A in state

4. Calculate the expected return for each security given the information below: State of the Economy Probability of Occurrence Expected return on A in state Expected return on B in state High growth 10% 60% 5% Moderate growth 20% 20% 25% No growth 50% 10% 5% Recession 20% -25% 0%

5. Estimate the volatility of stocks A and B in question (4) above.

6. What is the expected return on a portfolio that has $600 invested in stock A and $1,400 invested in stock B in question (4) above.

7. Calculate the covariance of returns on stocks A and B in question (4) above.

8. Estimate the volatility of the portfolio in question 6 which has 30% invested in stock A and 70% invested in stock B, using covariance.

9. Repeat question 8 using correlation.

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