Problem. 3 (10 points) A. Use the following information to answer the questions below: Security Return(SI) Return(S2) A 16% 20% B 1296 25% Risk-free asset return - 4% S1 is State-1 and S2 is State-2 Prob(SI) -0.6, Prob(S2) -0.4 i) What is the expected return on Security A and the expected return on Security B? (2 points) ii). What is the portfolio expected return with 140% of wealth invested in A and the remainder in the risk-free asset via borrowing at the risk-free interest rate? (3 points) Problem 3 (continued) A pension fund manager is considering three mutual funds. The first is a stock fund, the second is a long-term government and corporate bond fund, and the third is a T-bill money market fund that yields a sure rate of 5.5%. The probability distributions of the risky funds are: Standard Deviation 32% Expected Return Stock fund (5) 15% Bond fund (B) 9 The correlation between the fund returns is 0.15. 23 What is the Sharpe ratio for the minimum variance portfolio (MVP)? (5 points) [Hint: The minimum-variance CAL is the line joining the risk-free asset to the minimum-variance portfolio (MVP). Now calculate slope of line after characterizing the minimum-variance portfolio.)