PLEASE ANSWER BOTH PARTS:

The following table shows realized rates of return for two stocks.

	A	B	C
1	Year	Stock A	Stock B
2	1	5%	15%
3	2	-11%	-14%
4	3	-6%	-9%
5	4	5%	28%
6	5	14%	8%
7	6	5%	7%

What is the arithmetic average return for stock B?

What is the variance for stock B?

What is the covariance of returns?

PART B:

Assume that there are only two stocks in the economy, stock A and stock B. The risk-free asset has a return of 3%. The optimal risky portfolio, i.e., the portfolio with the highest Sharpe ratio, is given below:

	A	B	C	D
1		Stock A	Stock B	Risk-free asset
2	Expected return	0.062	0.08	0.03
3	Variance	0.16	0.0484
4	Standard deviation	0.4	0.22
5	Covariance	0.0264
6
7	Optimal risky portfolio
8	Weights	0.03099	0.969	=1-B8
9	Expected return	0.0794		=B8*B2+C8*C2
10	Variance	0.04719		=B8^2*B3+C8^2*C3+2*B8*C8*B5
11	Standard deviation	0.2172		=B10^0.5
12	Sharpe ratio	0.2276		=(B9-D2)/B11

What is the expected return of a portfolio composed of 20% of the optimal risky portfolio and 80% of the risk-free asset?

What is the standard deviation of such a portfolio?