Question: Mrs Daisy is considering two securities, A and B, and the relevant information is given below: State of Economy Probability Retrun on Security A (%)

  1. Mrs Daisy is considering two securities, A and B, and the relevant information is given below:

State of Economy

Probability

Retrun on Security A (%)

Return on Security B (%)

Bear

0.6

3.00%

6.50%

Bull

0.4

15.00%

6.50%

  1. Calculate the expected returns and standard deviations of security A and security B. (5 marks)
  2. Explain how diversification can reduce the unsystematic risk of a given portfolio? (3 marks)

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