Question: Consider the following information: State Probability A B Boom 0.6 20% -5% Bust 0.4 -10% 10% What are the expected return and standard deviation of

Consider the following information:

State Probability A B

Boom 0.6

20% -5%

Bust 0.4 -10% 10%

  1. What are the expected return and standard deviation of stock A?
  2. What are the expected return and standard deviation of stock B?
  3. If you invest 50% of your money in stock A and 50% of your money in stock B, what are the expected return and standard deviation for the portfolio as a whole (considering both states of the economy)?
  4. Use the results of a-c to explain the benefit of diversification.

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