Consider the following information in Figure 1 below for a portfolio including security A and security BThe weights for A and B are 50% each:

If you want to include one more security C into the above portfolio (e.g., a new portfolio including securities A, B, and C), what is the new portfolio variance if you invest 40% of C and 60% of the old portfolio including A and B? Assume the standard deviation of C is 10%, and correlation coefficient between the old portfolio and C is 0.8.

Figure 1 State of the economy Return on A (%) Return on B (%) Probability of state of economy 0.2 0.3 0.4 0.1 Boom Growth Normal Recession 15 10 -5 5 0 0 10 20