Suppose you have $20,000 to invest in two securities: Spot and Dot. After you have done an extensive analysis of the economy and the two securities, you have the following forecasts:

State of the Economy	Probability of Occurrence	Spot Expected Return	Dot Expected Return
Boom	15%	-6%	35%
Normal	60%	12%	20%
Bust	25%	18%	-10%

a) What are the expected returns on Spot and Dot?

b) What are the standard deviations of the returns on Spot and Dot?

c) What is the covariance of the returns on Spot and Dot?

d) What is the correlation between Spot and Dot?

e) What is the composition of the portfolio if you wish to have an expected return of 12 percent on the portfolio?

f) What is the standard deviation of the portfolio?

Answer rating: 100% (QA)

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