1. You are presented with the following stocks: Stock Number of shares Price per share $ per share E(r) Standard Deviation 1 200 60 .10 .12 2 -100 50 .08 .10 3 200 25 .18 .20 The three stock correlation coefficients are : 1,2 =.20; 2,3 = .10; 1,3 = .50 In addition the investor borrows $2,000 at the risk-free rate of 4%. a. Calculate the portfolios expected return and standard deviation. b. Would you consider replacing the third stock with a new one, same expected return, but 25% standard deviation and correlation of zero with stock one and two? Show your argument numerically. 2. Consider a risky fund with 18% standard deviation and 15% expected return and a risk free rate assets with 5% rate of return. a. Write the Capital Allocation Line equation. b. Using the fund and the risk free asset, design two portfolios; first one with 11% standard deviation, second with 22% standard deviation (calculate the fund and the risk free assets weights) and report the portfolio expected return.

1. You are presented with the following stocks: The three stock correlation coefficients are :1,2=.20;2,3=.10;1,3=.50 In addition the investor borrows $2,000 at the risk-free rate of 4%. a. Calculate the portfolio's expected return and standard deviation. b. Would you consider replacing the third stock with a new one, same expected return, but 25% standard deviation and correlation of zero with stock one and two? Show your argument numerically. 2. Consider a risky fund with 18% standard deviation and 15% expected return and a risk free rate assets with 5% rate of return. a. Write the Capital Allocation Line equation. b. Using the fund and the risk free asset, design two portfolios; first one with 11% standard deviation, second with 22% standard deviation (calculate the fund and the risk free assets' weights) and report the portfolio expected return. 1. You are presented with the following stocks: The three stock correlation coefficients are :1,2=.20;2,3=.10;1,3=.50 In addition the investor borrows $2,000 at the risk-free rate of 4%. a. Calculate the portfolio's expected return and standard deviation. b. Would you consider replacing the third stock with a new one, same expected return, but 25% standard deviation and correlation of zero with stock one and two? Show your argument numerically. 2. Consider a risky fund with 18% standard deviation and 15% expected return and a risk free rate assets with 5% rate of return. a. Write the Capital Allocation Line equation. b. Using the fund and the risk free asset, design two portfolios; first one with 11% standard deviation, second with 22% standard deviation (calculate the fund and the risk free assets' weights) and report the portfolio expected return