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4. You are considering a portfolio of three stocks: Stock A has an expected return of 8%, with a standard deviation of 20%. Stock B

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4. You are considering a portfolio of three stocks: Stock A has an expected return of 8%, with a standard deviation of 20%. Stock B has an expected return of 4%, with a standard deviation of 10%. Stock C has an expected return of 3%, with a standard deviation of 7%. The correlation coefficients between these stocks' return are: Stock A with Stock B: 0.1 Stock A with Stock C: 0.2 Stock B with Stock C: 0.5 (a) Based on these data, construct a covariance matrix for the returns on the three stocks and calculate the inverse covariance matrix. (b) Calculate the expected return and standard deviation of the minimum variance portfolio. (C) Suppose the target portfolio return pv = 5%, calculate the wights in the portfolio and the risk of this portfolio (d) Suppose that a risk free asset with return f = 2% is introduced to the portfolio. Calculate the expected return and standard deviation of the market portfolio and find the equation of the capital market line. (e) If add three more stocks to the portfolio, how many variances and how many unique covariance will you need to calculate the portfolio variance (Do not calculate the portfolio variance)? 4. You are considering a portfolio of three stocks: Stock A has an expected return of 8%, with a standard deviation of 20%. Stock B has an expected return of 4%, with a standard deviation of 10%. Stock C has an expected return of 3%, with a standard deviation of 7%. The correlation coefficients between these stocks' return are: Stock A with Stock B: 0.1 Stock A with Stock C: 0.2 Stock B with Stock C: 0.5 (a) Based on these data, construct a covariance matrix for the returns on the three stocks and calculate the inverse covariance matrix. (b) Calculate the expected return and standard deviation of the minimum variance portfolio. (C) Suppose the target portfolio return pv = 5%, calculate the wights in the portfolio and the risk of this portfolio (d) Suppose that a risk free asset with return f = 2% is introduced to the portfolio. Calculate the expected return and standard deviation of the market portfolio and find the equation of the capital market line. (e) If add three more stocks to the portfolio, how many variances and how many unique covariance will you need to calculate the portfolio variance (Do not calculate the portfolio variance)

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