QUESTION 2

The probability distributions of returns for Stock A and Stock B are given below:

State of Economy Probability Stock A Stock B

Bull 0.3 20% 5%

Bear 0.7 12% 10%

REQUIRED

a. Calculate the expected returns for Stock A and Stock B. [5 marks]

b. Calculate the variances of returns for Stock A and Stock B. [5 marks]

c. Calculate the correlation of Stock A with Stock B. [5 marks]

d. Based on the correlation obtained in part (c), calculate the expected return and standard deviation of the minimum variance portfolio.