Consider the following information:

State	Probability	A	B
Boom	0.4	20%	-20%
Bust	0.6	-10%	20%

a. What is the expected return on asset A? (2%)

b. What is the standard deviation for asset A? (3%)

c. What is the expected return on asset B? (2%)

d. What is the standard deviation for asset B? (3%)

e. If you invest 50% of your money in Asset A and 50% of your money in Asset B, what

is the expected return for the portfolio as a whole (considering both states of the

economy)? (2%)

f. What is the standard deviation of the portfolio? (3%)

g. Use the results of a-f to explain the benefit of diversification. (10%)