Q2 (a) The risk free rate is 0.5%. Using the data below

(i) Calculate the variance of Stock A and variance of Stock B

(ii)Calculate the correlation coefficient between Stockand Stock B

(iii) Calculate the weightsof Stock A and Stock B in the optimal risky asset portfolio.

State Probability Return Stock A (%) Return Stock B (%)

1 0.1 10% 8%

2 0.2 13% 7%

3 0.2 12% 6%

4 0.3 14% 9%

5 0.2 15% 8%

1 E(Ra) 13.2% E (Rb) 7.7%

Std Dev A 1.5% StdDev B 1.1%