Chapter 11: Diversification and risk asset allocation 1) If the returns on two stocks are highly correlated, what does this mean? If they have no correlation? If they are negatively correlated? 2) Use the following information on states of the economy and stock returns to calculate the expected return for Dingaling Telephone: State of Economy Recession Normal Boom Probability of State 0.30 0.60 0.10 Security Return in State -18.0% 9.0% 15.0% 3) Using the information in the previous question, calculate the standard deviation of Dingaling's returns. (Note: this asks for the standard deviation of a KNOWN probability distribution.)