Question: State Probability Return: Stock 1 Return: Stock2 Bear .25 -.020 .034 Normal .60 .138 .062 Bull .15 .218 .092 a.) Calculate the covariance of return

State	Probability	Return: Stock 1	Return: Stock2
Bear	.25	-.020	.034
Normal	.60	.138	.062
Bull	.15	.218	.092

a.) Calculate the covariance of return between Stock 1 and Stock 2.

b.) Calculate the correlation of return between Stock 1 and Stock 2.

c.) If you combine Stock 1 and Stock 2 into a portfolio, will you obtain diversification benefits? Why, or why not (be sure to provide quantitative justification for your answer)?

d.) What is the variance of return for a portfolio that invests 40% of wealth in Stock 1 and 60% in Stock 2.

Please use formulas and careful reasoning!

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