Consider the following probability distribution for stocks A and B. Scenario Probability Return on Stock A...

  

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Consider the following probability distribution for stocks A and B. Scenario Probability Return on Stock A Return on Stock B 1 0.3 2 0.5 3 0.2 7% 11% -16% -9% 14% 26% Assume that the risk-free rate is 3%. The correlation between A and B is -0.5. Please answer the following questions. (6 points.) 1. Suppose the tangency portfolio on the efficient frontier has expected return of 6.9%. Please solve for the optimal weights of the tangency portfolio. 2. Compute the reward-to-volatility ratios of Stock A and Stock B. Explain why tan- gency portfolio is superior to the individual stock A or B. Please provide quantita- tive argument. 3. Suppose two investors are making the optimal capital allocation decisions. Investor Consider the following probability distribution for stocks A and B. Scenario Probability Return on Stock A Return on Stock B 1 0.3 2 0.5 3 0.2 7% 11% -16% -9% 14% 26% Assume that the risk-free rate is 3%. The correlation between A and B is -0.5. Please answer the following questions. (6 points.) 1. Suppose the tangency portfolio on the efficient frontier has expected return of 6.9%. Please solve for the optimal weights of the tangency portfolio. 2. Compute the reward-to-volatility ratios of Stock A and Stock B. Explain why tan- gency portfolio is superior to the individual stock A or B. Please provide quantita- tive argument. 3. Suppose two investors are making the optimal capital allocation decisions. Investor