Problem 1 (50 points). Suppose you are interested in forming a portfolio consisting of two risky

securities, securities A and B. Here are their respective return distributions (note: 13., corresponds to

the probability that state 3 occurs, whereas rm, and Tbs correspond to the state-contingent returns on

securities A and B): p3 TIES Tbs

15% 0% 8% 20% 5% 0%

30% 8% 5% 20% 10% 10%

15% 20% 0% 10 points) What are the expected returns for securities A and B? 10 points) What are the standard deviations for the returns on securities A and B? 539?“? (

(

(5 points) What is the correlation between returns on securities A and B? 10 points) What is the expected return and standard deviation for an equally weighted portfolio

consisting of securities A and B? F11 (10 points) Suppose securities C and D have the same expected returns and standard deviations

as securities A and B, but are uncorrelated. What is the expected return and standard deviation

for an equally weighted portfolio consisting of securities 0 and D? F. (5 points) Explain why the portfolio consisting of securities C and D is riskier than the portfolio

consisting of securities A and B.