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The table below shows future one-year returns on two stocks A and B in three possible economic states. State(s) p(s) A B Boom 0.20 50%
The table below shows future one-year returns on two stocks A and B in three possible economic states.
State(s) | p(s) | A | B |
Boom | 0.20 | 50% | 5% |
Normal | 0.50 | 12% | 5% |
Recession | 0.30 | -20% | 15% |
Calculate covariance and correlation between the two stocks (5 points).
Please construct an opportunity set if an investor only holds the two stocks (10 points). (calculate expected returns and standard deviations of portfolios under different portfolio weights of X and Y, draw the combinations of risk and return on a scatter plot, and connect the points to form the opportunity set curve).
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