a) It was observed that during the 2007 2009 financial crisis, the stock prices, and the yield to maturity (YTM) of riskless investments, such as the American bonds, declined. Can you explain this observation?

b) Suppose that you hold a well-diversified portfolio, and you want to add one more stock in it. You are given the following information about the returns of three stocks:

	Stock A	Stock B	Stock C
Covariance with the market	0.65	0.88	0.05
standard deviation	0.50	0.40	0.90

Moreover, the risk-free rate is 4%, the market (expected) return is 8% and the variance of market returns is 0.20.

i) If you are a risk-averse investor, which of the above stocks would you choose? Explain.

ii) What is the expected return of the stock that you chose?

iii) Create a new portfolio, that has a standard deviation of 0.15, by investing in your chosen stock and the risk-free rate (assuming a zero correlation between the stock and the risk-free rate)

iv) What is the expected return of the portfolio you created in the previous question?