3. You have the following information about the returns on two stocks: Stock 1 Stock 2 Expected return 20% 40% Standard deviation 30% 50% Correlation coefficient 0.2 Suppose that you form a portfolio which is 40% invested in stock 1, and 60% invested in stock 2.

(a) What is the mean, variance, and standard deviation of the portfolio return?

(b) What is the covariance and correlation coefficient between the return of stock 1 and the return of the portfolio described in part (a)?

(c) Suppose that the riskfree rate is 10%. You are interested in combining the portfolio you found in part (a) with riskfree lending/borrowing to generate a new portfolio that will give you the same expected return as stock 1. Assume that you will invest $10,000 in this new portfolio. How much money will you lend/borrow at the riskfree rate, and how much money will you invest in each of the two assets (e.g. portfolio and riskfree asset)?

3. You have the following information about the returns on two stocks: Expected return Standard deviation Correlation coefficient Stock 1 Stock 2 20% 40% 30% 50% 0.2 Suppose that you form a portfolio which is 40% invested in stock 1, and 60% invested in stock 2