#One Efficient Frontier

Consider 3 stocks with the features depicted in the table below.

State	Prob.	Return Stock A	Return Stock B	Return Stock C
Recession	0.3	-0.04	0.06	0.6
Normal	0.5	0.05	0.07	0
Boom	0.2	0.2	0.06	-0.03

(a) (3 points) Compute expected returns (rA, rB, rC ) of each stock

(b) (3 points) Compute return volatilities (A, B, C ) of each stock

(c) (3 points) Compute return covariances (AB, AC , BC )

(d) (3 points) Compute return correlations (AB, AC , BC ) Suppose you invest $300 in stock A, $200 in stock B, and $700 in stock C.

(e) (3 points) What are the portfolio weights (xA, xB, xC )? Are your positions in stocks A, B, and C long (you buy) or short (you short-sell)? Justify.

(f) (3 points) What is the expected return of the portfolio (rP )?

(g) (3 points) What is the volatility of the portfolio (P )?