An individual is considering investing in either the stock market, the bond market or a fully-insured bank account (i. e. zero risk) which offers a return of 4%. The individual has identified the following possibilitiesregarding the stockand bondmarkets. Probability Stock Returns Bond returns
0.25 2% 3%
0.40 8% 5%
0.35 11% 8%

Required:
a. Calculate the expected return, variance and standard deviation for stocks and bonds, and the covariance and correlation.
b. Which investment would a risk-averse individual undertake? Explain. How would your answer change if the bank account offered 7%? Explain. How would your answer change if the bank account offered 9%? Explain.