7. 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 3 risky investments that comprise the market. F is the risk-free asset. M is the market portfolio. All returns are annual returns. Assume you can take a short position in all assets, including the risk-free asset.

Answer the following questions with respect to this investment information:

a.) Using the correlation matrix, compute the covariance of asset C with asset B?

b.) What is the covariance of F and C?

c.) Using the correlation matrix, compute the beta of asset F.

d.) According to the CAPM, is security A priced correctly, undervalued or overvalued?

e.) You would like to find a combination of all the securities in the market and F to obtain a standard deviation of 1% on your overall portfolio. Suppose you have $100 to invest, how much (in dollars) do you need to invest in asset F if you choose the most efficient portfolio possible?

f.) You would like to find a combination of all the securities in the market and F to obtain an expected return of 18% on your overall portfolio. Suppose you have $100 to invest, how much (in dollars) do you need to invest in asset F if you choose the most efficient portfolio possible?

g.) A new security has expected return equal to 5%. What must its beta be for it to lie on the security market line?

h.) What is the value of the Sharpe ratio of asset B?

i.) An unknown portfolio has expected excess return equal to 16%, what must its standard deviation be for it to lie on the capital market line?

Correlation Matrix Investment Erri) Std Devi AA B C F M 0.2 1.0 -0.25 0.25 3.0% 10% 1.0 0.5 12.0% 15% -0.5 1.0 10.0% 5% 0.5 2.0% 1.0 15.0% 5% 1.0