The stock market comprises two stocks, A and B, and a risk-free asset. The return on...

 

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The stock market comprises two stocks, A and B, and a risk-free asset. The return on the risk-free asset is R = 1%. The table below gives next period's returns of the two stocks, RA and RB, in each state of the world. State Boom Probability 25% RA RB 9% 3% Recovery 50% 5% 1% Recession 25% -4% -1% Part A (9 Marks) Calculate the expected returns of stocks A and B and the standard deviations of these returns. Part B (6 Marks) o Calculate the covariance between A and B's returns, OA,B, and their correlation coefficient, PA,B- Part C (6 Marks) What is the minimum-variance portfolio composed of stocks A and B? Part D (9 Marks) What are the weights of stocks A and B in the tangency portfolio? Activ Go to S The stock market comprises two stocks, A and B, and a risk-free asset. The return on the risk-free asset is R = 1%. The table below gives next period's returns of the two stocks, RA and RB, in each state of the world. State Boom Probability 25% RA RB 9% 3% Recovery 50% 5% 1% Recession 25% -4% -1% Part A (9 Marks) Calculate the expected returns of stocks A and B and the standard deviations of these returns. Part B (6 Marks) o Calculate the covariance between A and B's returns, OA,B, and their correlation coefficient, PA,B- Part C (6 Marks) What is the minimum-variance portfolio composed of stocks A and B? Part D (9 Marks) What are the weights of stocks A and B in the tangency portfolio? Activ Go to S