5. You have information on several possible investments as laid out in the table below. A, B, and C are individual risky securities. For now, assume these are the only these 3 risky investments that comprise the market. F is the risk-free asset. M is the market portfolio. All returns are annual returns.

Answer the following questions with respect to this investment information: a. Using the correlation matrix, compute the covariance of asset A with the market.

b. Using the correlation matrix, compute the beta of asset C.

c. What is the expected excess return of B according to the Capital Asset Pricing Model (CAPM)? Is security B priced correctly, undervalued or overvalued?

d. Suppose the risk free rate is 5%, how much of security F is included in the market portfolio M? Briefly explain.

e. Suppose the market capitalization of asset B is $10M and the total market capitalization if $1,000M. If you invest $1M in the market portfolio, how many dollars are you investing in asset B?

f. You have $100,000 to invest. You would like use a combination of M and F to obtain a standard deviation of 4% on your overall portfolio. How much (in dollars) do you invest in F if you choose the most efficient portfolio possible?

g. Suppose the market capitalization of asset C is $500M and the total market capitalization if $1,000M. You have $100,000 to invest. You would like to find a combination of all the securities in the market and F to obtain a standard deviation of 8% on your overall portfolio. How much (in dollars) do you invest in asset C if you choose the most efficient portfolio possible?

h. You have $100,000 to invest. What is the maximum Sharp ratio you can obtain on a portfolio?

i. Suppose 3 additional firms issue shares of equity, so that now there are a total of 6 risky assets. The new assets are negatively correlated with A, B and C. Relative to the previous question, would the maximum Sharp ratio in this new economy be higher or lower? Briefly Explain.

j. A new security has expected return equal to 18.20% and the same beta of as security A. What is the alpha of the security? Does this security lie on the security market line? Briefly explain.

Correlation Matrix Investment E(r) A 19.20% 36% | 1.0000 0.7000 0.6000 0.0000 0.5 1.0000 0.5000 0.0000 0.6 1.0000 0.0000 0.4 1.0000 0.0 1.0 21.90% 12.00% 3.00% 12.00% 35% 25% 0% 10% C