PART 3. EXPECTED RETURN AND STANDARD DEV FOR ASSETS & PORTFOLIO (25 points)

You live in a world where there are two assets (Asset A and Asset B) and there are two states of nature ("Rain" and "Shine"). You are told that "Shine" and "Rain" will occur with probability 0.7 and 0.3 each. Below are the returns on the asset under each state of nature

"Shine" "Rain"

Asset A 20% -8%

Asset B 8%4%

(a)Calculate the Expected Return and Standard Deviation of Returns for each Asset. Show your work.

E(RA) = ________________ StDev (RA) =___________________

E(RB) = ________________ StDev (RB) =___________________

(b)Assume that you invest $800 in Asset A and $1200 in Asset B, what will be the Expected Return and Standard Deviation of Returns for the resulting portfolio? Show your work.

E(RP) = ________________ StDev (RP) =___________________