[Question (1)-(10) are sharing the same information]

Questions 1-10 are designed to review some statistical concepts as well as to help you understand the benefits from diversification. Assume that there are two assets (A and B) and there are four possible future scenarios. The four scenarios and their probabilities are shown in the following table. The last two columns show the returns on assets A and B in the four possible scenarios.

Scenario	Probability
Boom	0.3	0.15	-0.02
Normal	0.3	0.08	-0.01
Recession	0.3	-0.05	0.03
Disaster	0.1	-0.20	0.05

1. What is the expected return on asset A? 2. What is the expected return on asset B? 3. What is the standard deviation of the return on A? 4. What is the standard deviation of the return on B? 5. What is the covariance between two asset returns? 6. What is the correlation between two asset returns? 7. Now, suppose that you construct a portfolio with asset A (20%) and asset B (80%). What is the expected return on this portfolio? 8. What is the standard deviation of the portfolio return?

9. Suppose that Mike has been holding asset B. (That is, Mike is holding a portfolio that entirely consists of asset B). Today, a stockbroker came to Mike and recommended that he add a little bit of asset A into his portfolio (for example, 80% of asset B and 20% of asset A). Mike rejected this suggestion because he thinks that it is not a good idea to add a riskier asset into his portfolio -- based on the answers for Q3 and Q4, he knows that asset A is riskier (than asset B) in the sense that it has a higher standard deviation. Do you think that rejecting the stock broker's suggestion was a correct decision? a. Yes b. No 10. Systematic risk refers to the part of the total risk of an investment that can be diversified away.

a. true

b. false