computing the 2 questions.

Consider the following setup: . 3 states of the world: P1 = Prob(s) = 0.3, P2 = Prob(s) = 0.4 and P3 = Prob(s) = 0.3 1 Asset A's price today is PA0 = 104, in 6 months it pays for sure a dividend D2,0.5 1.5 and its ex-dividend price will be state-dependent either PA.0.5(81) = 110, P4.0.5(82) = 103 and PA.0.5(83) = 90 Asset B's price today is PB,0 = 51, in 6 months it pays for sure a dividend DB 0.5 = 3.5 and its ex-dividend price will be state-dependent either P8.0.5(81) = 52, P3,0.5(82) = 57 and P8,0.5(83) = 35 the risk-free interest rate during this 6 months is 0.01 Compute the following 1. The expected returns, risk premia, volatilities and correlations of the three assets 2. The expected return and volatility of a portfolio invested 60% (ie, with a weight of 0.6) in asset A. 30% in asset B and 10% in the risk-free asset Hint 1: for question 2 first compute the (3 x 1) vector of expected return fo and the (3 x 3) covariance matrix Vo Hint 2: the covariance between a constant and a random variable is zero Consider the following setup: . 3 states of the world: P1 = Prob(s) = 0.3, P2 = Prob(s) = 0.4 and P3 = Prob(s) = 0.3 1 Asset A's price today is PA0 = 104, in 6 months it pays for sure a dividend D2,0.5 1.5 and its ex-dividend price will be state-dependent either PA.0.5(81) = 110, P4.0.5(82) = 103 and PA.0.5(83) = 90 Asset B's price today is PB,0 = 51, in 6 months it pays for sure a dividend DB 0.5 = 3.5 and its ex-dividend price will be state-dependent either P8.0.5(81) = 52, P3,0.5(82) = 57 and P8,0.5(83) = 35 the risk-free interest rate during this 6 months is 0.01 Compute the following 1. The expected returns, risk premia, volatilities and correlations of the three assets 2. The expected return and volatility of a portfolio invested 60% (ie, with a weight of 0.6) in asset A. 30% in asset B and 10% in the risk-free asset Hint 1: for question 2 first compute the (3 x 1) vector of expected return fo and the (3 x 3) covariance matrix Vo Hint 2: the covariance between a constant and a random variable is zero