1. The universe of available securities includes two risky stock funds, A and B, and T-blls. The data for the universe are as follows Expected Return Standard Deviation A 10% 20% 30 60 T-bills The correlation coefficient between funds A and B is -0.2. a. Find the optimal risky portfolio, P, and its expected return and standard deviation. b. Find the slope of the CAL supported by T-bills and portfolio P c. How much will an investor with A 5 invest in funds A and B and in T-bills? 2. The data below describe a three-stock financial market that satisfies the single-index model. Mean Excess Standard Stock Capitalization Beta Return Deviation $3,000 $1,940 $1,360 1.0 10% 40% A 0.2 2 30 1.7 17 50 The standard deviation of the market index portfolio is 25%. a. What is the mean excess return of the index portfolio? b. What is the covariance between stock A and stock B? c. What is the covariance between stock B and the index? d. Break down the variance of stock B into its systematic and firm-specific components. 3. The following are estimates for two stocks. Stock Expected Return Beta Firm-Specific Standard Deviation A 13% 0.8 30% 1.2 18 40 The market index has a standard deviations of 22% and the risk-free rate is 8% a. What are the standard deviations of stocks A and B? b. Suppose that we were to construct a portfolio with proportions: Stock A 30 Stock B: 45 T-bills: 25