An investor is considering three mutual funds. The first two are stock funds A and B, the third is a T-bill money market fund that yields a rate of 3%. The probability distribution of the risky funds is as follows:
| State |
Probability |
Return on Stock A |
Return on Stock B |
| 1 |
0.30 |
7%
|
-9% |
| 2 |
0.5 |
11% |
20% |
| 3 |
0.2 |
-10% |
26% |
(a) What are the expected returns and standard deviations of stock fund A and B? What is coefficient of correlation between A and B?
(b) Tabulate and draw the investment opportunity set of the two risky funds. Use investment proportions for the stock fund of zero to 100% in increments of 20%.
(c) Use your calculation results in part (b) to draw the figure of the opportunity set of stock fund A and B.