4. Assume that the economy can be in three possible states next year: boom, normal, or slow economic growth. An expert source has calculated that P(boom):30. P(normal) 50, and P(Slow).20. The returns for Stock A, RA, and Stock B, RB, under each of the economic states are provided in the table. a) What is the expected value and standard deviation of the returns for stock A. b) What is the expected value and standard deviation of the returns for stock B. c) What is the joint probability distribution for the returns of stock A and stock B? d) What are the covariance and the correlation coefficient of returns of stock A and stock B? Event Boom Normal Slow 0.3 0.5 0.2 RA 0.20 0.12 0.05 Ra 0.30 0.10

63. Consider three investments. You are given thefollowing means, standard deviations, and correlations for the annual return on these three investments.The means are 0.12, 0.15, and 0.20. The standarddeviations are 0.20, 0.30, and 0.40. The correlationbetween stocks 1 and 2 is 0.65, between stocks 1 and3 is 0.75, and between stocks 2 and 3 is 0.41. Youhave $10,000 to invest and can invest no more thanhalf of your money in any single stock. Determine theminimum-variance portfolio that yields a mean annualreturn of at least 0.14.

Given the following investment returns from two stocks:Stock A: 5%,6%,7%,9%,23% (mean = 10% and standard deviation = 7.416%)Stock B: 50%,60%,70%,90%,230% (mean = 100% and standard deviation = 74.16%).Which stock has the greatest relative risk? Which stock should a risk seeking investor choose? Two correct answers 1.  Stock A has the greatest relative risk. 2.  Stock B has the greatest relative risk. 3.  Both stocks have the same amount of relative risk. 4.  A risk seeking investor should invest in Stock A. 5.  A risk seeking investor should invest in Stock B. 6.  A risk seeking investor should invest in either of the two stocks since they are equally attractive.

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