Using the scenario analysis provided in the following table on stocks XY and ZW and knowing that the current price of XY and ZW is 35 and 20 respectively a) Calculate the expected return and standard deviation of the two stocks under the assumption that none of the stocks pay dividends State of the Economy Probability Price of XY in 1 year Price of ZW in 1 year Boom 5 40 30 Steady 45 36 26 Recession 50 24 18 b) You decide to invest 20,000 in a portfolio of XY and ZW shares with 50 weight in each stock What are the expected return and standard deviation of the portfolio, assuming a coefficient of correlation of 0 How would they change if the weights were 40 and 60 respectively for stock XY and ZW c) Explain the role of correlation in reducing portfolio variance

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Question: Using the scenario analysis provided in the following table on stocks XY and ZW and knowing that the current price of XY and ZW is

Using the scenario analysis provided in the following table on stocks XY and ZW and knowing that the current price of XY and ZW is 35 and 20 respectively

a) Calculate the expected return and standard deviation of the two stocks under the assumption that none of the stocks pay dividends

State of the Economy	Probability	Price of XY in 1 year	Price of ZW in 1 year
Boom	5%	40	30
Steady	45%	36	26
Recession	50%	24	18

b) You decide to invest 20,000 in a portfolio of XY and ZW shares with 50% weight in each stock. What are the expected return and standard deviation of the portfolio, assuming a coefficient of correlation of 0? How would they change if the weights were 40% and 60% respectively for stock XY and ZW?

c) Explain the role of correlation in reducing portfolio variance

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