(Show all the calculation step by step and show which formula u use)

QUESTION 1 (20 marks) a. What does it mean to diversify your portfolio, and what are you trying to gain by so doing? (4 marks) b. What is beta in the financial world? What is standard deviation in the financial world? What type of risk does each measure? What assumption do you make about the stock when you use beta as a measure of its risk? (4 marks) c. Dull Consultants, a famous think tank in Malaysia, has provided probability estimates for the four potential economic states for the coming year. The probability of a boom economy is 10%, the probability of a stable growth economy is 15%, the probability of a stagnant economy is 50%, and the probability of a recession is 25%. Estimate the expected returns, variance and standard deviation on the following individual investments for the coming year. If the estimates for both the probabilities of the economy and the returns in each state of the economy are correct, which investment would you choose, considering both risk and return? Why? (12 marks) Forecasted Returns for Each Economy INVESTMENT Boom Stable Growth Stagnant Recession Stock 25% 12% 4% -12% Corporate Bond 9% 7% 5% 3% Government Bond 8% 6% 40% 2%