FIN 303 Professor Dow Risk Problem Set 1. You are given the following probabilities of payouts for three securities (A, B and C). For each security, calculate the expected payout and the standard deviation. Draw the histograms for the distributions of the payouts. Probabilities Payout 0 A B C 0.2 0.1 0.3 1234 0.2 0.2 0.2 0.2 0.4 0.0 0.2 0.2 0.2 0.2 0.1 0.3 2. Plot the securities listed below on a risk-return diagram. Which securities can we be sure that people would not want to hold if given the choice of picking one? Security Expected Return Standard Deviation A B C E F 6 3.1 3.1 2.5 2.7 1.7 1.4 4.2 5.5 2.6 1.3 3.7 2.9 3. There are two equally-probable states of the world; call them "good" and "bad". There are two securities: A and B. State of the world Good Bad Return to A Return to B 6 4 4 8 Calculate the expected returns and standard deviations of three portfolios: one consisting of security A, one consisting of security B, and one consisting of security A plus security B. Compare the desirability of the portfolios. Calculate the covariance and correlation coefficient between A and B.