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There are three securities in the market. The following chart shows their possible payoffs: Security 1 Return State 1 Security 3 Return Market Return .12 .25 .10 Probability .15 .35 .35 2 Security 2 Return .25 .15 .20 .10 .18 .20 .15 .10 3 .15 .20 .25 .21 4 .15 .24 (a) What are the expected return and standard deviation of each security? (b) What are the covariances and correlations between the pair of securities? (c) What are the betas of each stock? (d) What are the expected return and standard deviation of a portfolio with half of its funds invested in security 1 and half in security 2? Calculate the portfolio beta and comment. (e) What are the expected return and standard deviation of a portfolio with half of its funds invested in security 1 and half in security 3? Calculate the portfolio beta and comment. (f) What are the expected return and standard deviation of a portfolio with half of its funds invested in security 2 and half in security 3? Calculate the portfolio beta and comment. There are three securities in the market. The following chart shows their possible payoffs: Security 1 Return State 1 Security 3 Return Market Return .12 .25 .10 Probability .15 .35 .35 2 Security 2 Return .25 .15 .20 .10 .18 .20 .15 .10 3 .15 .20 .25 .21 4 .15 .24 (a) What are the expected return and standard deviation of each security? (b) What are the covariances and correlations between the pair of securities? (c) What are the betas of each stock? (d) What are the expected return and standard deviation of a portfolio with half of its funds invested in security 1 and half in security 2? Calculate the portfolio beta and comment. (e) What are the expected return and standard deviation of a portfolio with half of its funds invested in security 1 and half in security 3? Calculate the portfolio beta and comment. (f) What are the expected return and standard deviation of a portfolio with half of its funds invested in security 2 and half in security 3? Calculate the portfolio beta and comment

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