Problem 3 (10 points) Looking ahead to next year, the expected returns for ABC Company stock, given different predictions and their respective probabilities, would be summarized in the following table: Pessimistic 5.00% Realistic 8.00% Expected return (%) Probability 30% 60% Optimistic 12.00% 10% a) Calculate the expected return of firm ABC. (2 points) b) Calculate the standard deviation of returns for firm ABC. (2 points) You have a sum of money that you plan to invest in the stock market. X Y Expected return (%) Standard deviation of return in (%) 12.00% 14.00% 1.8000% 1.3000% c) If you wanted to invest in only one of these two securities, X or Y, which would you consider? Why? (2 points) d) If you decide to invest 60% of your assets in stock X and 40% in stock Y, calculate the expected return and the standard deviation of your portfolio knowing that the correlation coefficient between the two titles is 0.73. (2 points) e) If you decide to invest 45% of your assets in stock X and the rest in a bond risk-free Canadian government offering an annual return of 6%, calculate the expected return and the standard deviation of the returns of your new portfolio. (2 points)

Expected return (%) Standard deviation of return in (%) X 12.00% 1.8000%

Pessimiste Raliste Optimiste WAN WAWAANAA www 5.00% 8.00% 12.00% Rendement espr (%) Probabilit 30% 60% 10% 12.00% Rendement espr (%) cart-type du rendement en (%) 1.8000%