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Observe returns on stocks A and B on three dates: Returns Date Stock A Stock B 1 3% 4% 2 4% 6% 3 1% 3%

Observe returns on stocks A and B on three dates:

Returns

Date Stock A Stock B

1 3% 4%

2 4% 6%

3 1% 3%

What is the standard deviation of the individual stock returns? What is the covariance? What is the correlation?

Suppose further that the risk-free rate is 2%. What is the Sharpe Ratio of the optimal portfolio? Describe the portfolio weights of the optimal portfolio?

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