(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) Show that B is priced according to the CAPM.

(d) Suppose the risk-free rate is 5%. How much of security F is included in the market portfolio M? Briefly explain.

(e) Assume that you want to form a portfolio that consists of a long position of $18,000 in asset C, and a short position of $6000 in asset A. What is the expected return and risk of this portfolio?

(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? What is the return of this portfolio?

(g) You have $100,000 to invest. What is the maximum Sharpe Ratio you can obtain on a portfolio? Show the calculation.

(h) 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 Sharpe Ratio in this new economy be higher or lower? Briefly explain.

Question 2 (14 marks) 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. Investment A M A 1.0000 Eri) 19.20% 21.90% 12.00% 3.00% 12.00% B 36% 35% 25% 0% 10% Correlation Matrix B F 0.7000 0.6000 0.0000 1.0000 0.5000 0.0000 1.0000 0.0000 1.0000 0.5 0.6 0.4 0.0 1.0 F M Answer the following questions with respect to this investment information