Consider 2 stocks A and B. You are given

(i) The expected return on A and B are 14% and 10%, respectively.

(ii) The share price of A is 75, and the share price of B is 20

(iii) The following variance-covariance matrix:

Stock A Stock B

Stock A 0.3 0.12

Stock B 0.12 0.15

a. Mike has 700 of cash. He borrows 20 shares of A and then uses the cash and proceeds from short sales to purchase B. Calculate the expected return and the volatility of Mike's portfolio.

b. Suppose that the market consists of Stock A and Stock B as the only 2 risky assets, and that the risk-free interest rate is 4%. Determine the weights of the 2 stocks in the tangent portfolio.

c. Determine the expected return and volatility of the tangent portfolio.

d. Howard wants to invest 10,000 in an efficient portfolio with return variance of 0.3. Determine the allocation in Howard's portfolio and the expected return on Howard's portfolio.

e. Alex wants to invest 10,000 in an efficient portfolio with an average return of 9%. Determine the allocation in Alex's portfolio and the volatility on Alex's portfolio