4. Diversification can eliminate risk if two events areperfectly negatively correlated. Suppose that two firms arecompeting for a government contract and have an equal chance ofwinning. Because only one firm can win, the other must lose, so thetwo events are perfectly negatively correlated. You can buy a shareof stock in either firm for $20. The stock of the firm that winsthe contract will worth $40, while the stock of the loser willworth $10. • If you buy two shares of one firm, calculate theexpected value and variance of two shares. • If you buy one shareon each firm, calculate the expected value and variance of twoshares.
