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Covariance between the returns on the two securities

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Reference no: EM133117001

The following table provides information about securities A and B:

State of economy          Probability of state of the economy       Security A       Security B

Bear                              0.2                                    0.10                   -0.10

Normal                          0.7                                    0.30                    0.05

Bull                               0.1                                   0.20                    0.30

i) What is the covariance between the returns on the two securities?

ii) Assuming that capital asset pricing model holds and that A's beta is greater than B's beta by 2.05, what is the expected market risk premium?

iii) Suppose that an investor holds a portfolio consisting only of A and B. What are the minimum variance weights?

Reference no: EM133117001

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