1. (50 points) COVID-19 has resulted in a huge amount of uncertainty about the state of economy and the return on stocks. Suppose the current stock price for Delta Airlines (DAL) is $25 and the stock price for Abbott Laboratories (ABT) is $86. The consensus predictions by Wall Street economists for the state of the economy next year and the associated stock prices are the following: 0.25 23 State of the economy Deep recession (Worst COVID-19 Scenario) Mild recession (Continued shelter-in-place) Soft landing (Partial use of COVID-19 vaccine) Mild growth (Wide use of COVID-19 vaccine) Rapid growth (Best COVID-19 Scenario) Probability DAL ABT 0.10 15 165 122 0.35 38 95 0.20 42 85 0.10 50 80 The stock prices above are given ex-dividend. Next year, DAL is expected to pay a dividend of $0.24 per share and ABT is expected to pay a dividend of $1.88 per share. (a) What is the expected return on DAL stock, E(RDAL)? What is the standard deviation of the rate of return on DAL stock, ODAL? (b) What is the expected return on ABT stock E(RABT)? What is the standard deviation of the rate of return on ABT stock, o ABT? (c) What is the covariance and the correlation between the rate of return on DAL and ABT? (d) Suppose you invested 20% of your wealth in DAL and the rest in ABT. What is the expected return on your portfolio? What is the standard deviation of the rate of return on your portfolio? (e) Suppose an investor plans to invest her wealth in one (and only one) of these two stocks. Can you advise he which stock she should choose and why? If you can't tell, why not? (f) Now suppose that one year T-Bill rate is 1%. How will this change your answer to part (e)