Given the variance-covariance matrix, for the market S&P 500 and stocks X and Y, which is based on monthly data from July 2000 to June 2005 (given the assumption that it is July 2005). Suppose both X and Y are listed S&P 500 index. The beta of X is 0.727 and the beta of Y is 0.75. The average monthly risk premiums from 2000 to 2005 were: For S&P500 is 1.0%; For X is 0.6% and for Y is 1.1%. Assume the CAPM holds and the expected future market risk premium is 0.6% monthly. The risk-free interest rate is 0.3% monthly.

	S&P500	X	Y
S&P500	0.0256	0.0186	0.0192
X	0.0186	0.1225	0.0262
Y	0.0192	0.0262	0.0900

a. What were the alpha’s for stocks X and Y over the last 60 months?

b. What are the expected future rates of return for X and Y?

c. What are the optimal portfolio weights for the S&P 500, X and Y? Please explain the answer qualitatively.