1. The following table shows realized rates of return for two stocks.

	A	B	C
1	Year	Stock A	Stock B
2	1	5%	15%
3	2	-25%	-14%
4	3	-6%	-5%
5	4	5%	28%
6	5	14%	8%
7	6	8%	8%

a. What is the arithmetic average return for stock B?

b. What is the standard deviation for stock B?

c. What is the correlation of returns?

d. What is the expected return of a portfolio with 50% invested in stock A and the remainder in stock B?

e. What is the standard deviation of a portfolio with 50% invested in stock A and the remainder in stock B?

f. What should a rational, risk-averse investor do?

Invest only in stock B

Invest in neither stock

Invest in both stocks

Invest only in stock A

2. You have $7,000 to invest. You've done some security analysis and generated the following data for three stocks and Treasury bills, including weights in the optimal risky portfolio (ORP) from doing Markowitz portfolio optimization:

Security	Stock A	Stock B	Stock C	T-bills
Expected return (%)	12	10	5	1
Variance	0.04	0.03	0.02	0
Beta	1.2	1.5	0.8	0
Weight in ORP (%)	45	18	37	0

a. What is the expected return of the optimal risky portfolio (ORP)?

b. How much money should you invest in the ORP to achieve an expected return of 5% for the complete portfolio (in $)?

c. If you want to achieve an expected return of 5% for the complete portfolio, how much money should you invest in stock A (in $)?