Reference no: EM133115499

You want to invest in a portfolio consisting of two stocks: Apple and Orange. There are three possible states by the end of your investment horizon. The possible returns of Apple and Orange as well as the probability of each state occurring are summarized in the following table:

State	Probability	Apple	Orange
A	0.2	16%	-8%
B	0.4	6%	15%
C	0.4	-8%	0%

1. Calculate the expected returnand standard deviations of Apple and Orange as well as their correlation coefficient  

2. What is the expected return and standard deviation of a portfolio consisting of $54,000 invested in Apple and $36,000 in Orange? 

3. How would your answerin b) change if you need to borrow $40,000at the risk- free rate (3%) to finance your investment (i.e., the remaining $50,000 comes from your personal wealth)? 

4. Assume that Apple, Orange, and the risk-free asset are the only securities in the economy, is your choice of risky portfolio in b) and c) consistent with mean- variance optimization? Explain.