Mary Jane has a $1 million fully diversified portfolio. She subsequently inherits ABC company stock worth $50,000. Her financial advisor provided her with the following forecast information:

Expected Monthly Return

Original Portfolio: 0.5%

ABC company: 1.00%

Standard deviation of monthly returns

Original Portfolio: 2.00%

ABC company: 3..00%

The correlation of ABC stock with the original portfolio returns is 0.2.

The inheritance changes Marys overall portfolio and she is deciding whether to keep the ABC stock. Assuming Mary keeps the ABC stock, calculate:

1.Expected return of her new portfolio which includes the ABC stock

2.Covariance of ABC stock returns with the original portfolio returns.

3.Variance of the new portfolio that includes the ABC stock.

4.If Mary sells the ABC stock, she will invest the proceeds in risk-free government securities yielding 0.25% per month. Will the systematic risk of the new portfolio which includes government securities be higher or lower than her original portfolio? (3 points)