1. Calculate the expected return and standard deviation of a portfolio that is 50% invested in stock A and 50% invested in stock B. (Hint: You need to find the expected return and standard deviation of each stock and the covariance between these two stocks first)
State of Economy Probability Stock A’s return Stock B’s return
Recession 0.20 0.06 -0.20
Normal 0.55 0.07 0.13
Boom 0.25 0.11 0.33
2. What is the present value of the following cash flows assuming a 10% interest rate? $100 will be received in year 1,$200 will be received in year 2 and $300 will be received in year 3?