1. Jane Smith has a $500,000 fully diversified portfolio. She inherits XYZ Company common stock worth $60,000. Her financial adviser provided her with the following estimates:

Expected Monthly Returns Standard deviation of

monthly returns

Original portfolio 0.53% 2.12%

XYZ Company 1.45 3.02

The correlation coefficient of XYZ stock returns with the original portfolio is .35. Assuming Jane sells the XYZ stock and replaces it with the government securities yielding 0.3% monthly, calculate the:

1. Expected return of her new portfolio which includes the government securities (8 points)
2. Covariance of the government security returns with the original portfolio returns (3 points)
3. Standard deviation of her new portfolio which includes the government securities. (2 points)