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1. Consider three stocks A, B and C. Assume that each stock has normally distributed returns, denoted by the random variables XA, XB and Xc
1. Consider three stocks A, B and C. Assume that each stock has normally distributed returns, denoted by the random variables XA, XB and Xc which have the following means and standard deviations: MA = 3%,0A = 1% MB = 10%,OB = 10% Mc = 15%,oc = 20% Assume also that cor(XA, XB) = 0, cor(XA, Xc) = 0 but cor(XB, Xc) = 0.7. For example, B and C might both be tech stocks, while A is a canned fruit concern. Now, consider the following three two-stock portfolios, Y1, Y2 and Y3 made up of various combination of stocks A, B and C. Y1 = 0.25XA + 0.75XB Y2 = 0.5XA + 0.5Xc Y3 = 0.5Xc + 0.5XB. (a) Find the expected values of Y1, Y2 and Y3. (b) Find the variances of Y1, Y2 and Y3. (c) Give ranges for the returns of each portfolio Y1, Y2 and Y which will contain approxi- mately 95% of the observed returns over time, assuming the above distributions
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