Answer the next two questions with reference to this information: Analysts argue that two things can happen over the next year: the economy can continue as it is or it can go into recession. The returns of two stocks: General Electric (GE) and Cisco (CSCO) in each possible state are given below: State Return on GE Continue as-is 15 Recession −15 Return on CSCO 5 -1

The analysts estimate the probability of continuing as-is to be 0.8 , and the probability of a recession to be 0.2.

1. What is the expected return on a portfolio which is 120% in GE and −20% in CSCO?

(a) 10.04% (b) 8% (c) 2.55% (d) 0%

2. What is the variance of CSCO?

(a) 1.96%2 (b) 5.76%2 (c) 13%2 (d) 23.04%2 3