Mary is holding a portfolio that contains 33% of Stock A and 67% of Stock B. The expected annual returns of Stock A and Stock B, and their covariance matrix are given below:

Required:

1. What is the correlation coefficient between Stock A and Stock B? (2 marks)

2. If Mary borrows an amount of 50% of her own money at 5% and form a portfolio of 30% of Stock A, 30% of Stock B and 40% of Stock C, what is the expected return from the new portfolio? (8 marks)

A Stock E(R) 12.33% 16.18% A B4 Covariance Matrix B2 A 0.32 0.12 0.12 0.102 Mary is considering adding Stock C into her portfolio. Suppose that only yearly stock pric data is available. Stock C's prices over the past 4 years are given below, along with th index values of a market index over the past 4 years. The beta of Stock A with respect t this market index is 1.4 and the beta of Stock B with respect to this market index is 0.85. Year 12 24 Price of Stock CA 184 234 Market Index 9802 13002 1250 1400 34 184 44 302 A Stock E(R) 12.33% 16.18% A B4 Covariance Matrix B2 A 0.32 0.12 0.12 0.102 Mary is considering adding Stock C into her portfolio. Suppose that only yearly stock pric data is available. Stock C's prices over the past 4 years are given below, along with th index values of a market index over the past 4 years. The beta of Stock A with respect t this market index is 1.4 and the beta of Stock B with respect to this market index is 0.85. Year 12 24 Price of Stock CA 184 234 Market Index 9802 13002 1250 1400 34 184 44 302