Two stocks have the following joint distribution of returns:
P{r1=-1.0 and r2=0.15]=0.10
P{r1=0.5 and r2=0.15]=0.8
P{r1=0.5 and r2=1.65]=0.10
a) Determine the mean variances and returns of the two stocks
b) Plot feasible mean-standard deviation [E(r), std] combinations assuming the two stocks to be sole investments available
c) Which portfolio belongs to the mean-variance efficient set?
d) Show that stock 2 is mean-variance dominated by stock 1, yet enters all efficient portfolios but one. How do you explain this?
e) Suppose it is possible to lend but not to borrow at 5% without risk in addition to previous opportunities. Draw the new set of [E(r), std] combinations. Which portfolios are now efficient?