Question: Scenario Probability Return on stock A Return on stock B Boom 50% 20% 2% Normal 25% 15% 6% Recession 25% 10% 12% a) If you

Scenario	Probability	Return on stock A	Return on stock B
Boom	50%	20%	2%
Normal	25%	15%	6%
Recession	25%	10%	12%

a) If you invest 70% of your funds into stock A and 30% into stock B, what is the expected return of your portfolio in each state of the economy?

b) Use your knowledge of risk and return to explain why the portfolio is more heavily invested in Asset A (70%) than Asset B (30%).

c) What is the overall expected portfolio rate of return?

d) What is the standard deviation of the portfolio?

e) Based on your knowledge of diversification, would you predict that the individual standard deviations of assets A & B be higher, lower or equal to your answer in part d above?

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