You are interested in making investment in S and B. The risk-free rate of return is 6% and the market risk premium is 7%. The expected return of S is 25%, the expected return of B is 20%. The standard deviation of S is 9.22% and the standard deviation of B is 5%

States	Probabilities	S	B
1	0.4	25%	15%
2	0.3	35%	20%
3	0.2	15%	25%
4	0.1	15%	30%

Required: ( don't used excel, show step please and formula )

1. Compute and analyze the correlation between S and B round your answer to 2 decimals
2. allocate to S and B? (2 Marks)
3. Compute the expected return and risk of the minimum variance portfolio
4. How do you call the curve representing all the possible combinations between S and B?
5. Explain with you own words how to draw this graph? If you would like to create the optimal portfolio.
6. Explain with your own words how to find out graphically the optimal portfolio
7. Compute how much weight you will allocate to S and B in the optimal portfolio
8. Compute the expected return and risk of the optimal portfolio (2 Marks) The beta of the stock S is 0.5 while the beta of the stock B is 2:
9. Indicate for each stock S and B whether it's overpriced, underpriced or fairly priced and explain the reason

Answer rating: 100% (QA)

Analyzing Investments in S and B 1 Correlation To compute the correlation between S and B well use the formula r xi xyi sqrtxi x2 yi 2 where x and y are the returns of S and B in each state x and are ... View the full answer