1. What are the covariances and the correlation coefficients of the five stocks returns with those of the market portfolio?

2. What is the correlation coefficient between the returns of stock A and stock B.

EXHIBIT 3.12 THE CHARACTERISTICS OF THE MARKET PORTFOLIO. THE MARKET PORTFOLIO CONTAINS ALL ASSETS IN PROPORTION TO THEIR MARKET VALUE Market Portfolio Atco Bilco Carco Delco Enco $30 $10 9,000 $24 $18 5,000 $20 2,000 7,000 5,000 $90,000 $60,000 $90,000 $140,000 $120,000 $500,000 1. Share price 2. Number of shares (in millions) 3. Market value (in millions) 4. Weight 5. Expected Return 6. Risk: Volatility 7. Sharpe ratio (Risk-free rate = 4%) 100% 24% 13% 18% 5.8% 15% 0.120 12% 7% 25% 0.120 18% 9.4% 30% 0.180 28% 11.8% 40% 0.195 50% 10% 20% 0.300 0.180 Notes: The figures for the five stocks are given. 2Market value = Price (row 1) Number of shares (row 2) The market value of the market portfolio is equal to the sum of the five companies' market values. Market value (row 3) Market value row 3) *Weight = Market value of market portfolio $500,000 *The expected return of the market portfolio is the weighted average of the expected returns of the five stocks in row 5 using the weights in row 4: E(RM)=(18%x 5.8%)+(12%x7%)+(18% 9.4%)+(28%x11.8%) +(24%x13%) = 10% Sharpe Ratio = [Expected return (row 5) - 4%] Volatility(row 6)