Problem 3 (10 pts) Suppose in the market there are three stocks with the following information and the CAPM holds. Assume risk-free rate is 4% and the variance of the market portfolio is 0.04. Stocks Expected Return Mi A 19% B 14% 9% Beta Bi Idiosyncratic Riska oi 1.5 0.05 1.0 0.06 0.5 0.08 (a) Find the variance-covariance matrix & associated with the three stocks. (b) Write down the formulas in order to find the tangency portfolio associated with the three stocks. (Remark: this tangency portfolio is only constructed using the three stocks, and therefore not the market portfolio mentioned above.) Problem 3 (10 pts) Suppose in the market there are three stocks with the following information and the CAPM holds. Assume risk-free rate is 4% and the variance of the market portfolio is 0.04. Stocks Expected Return Mi A 19% B 14% 9% Beta Bi Idiosyncratic Riska oi 1.5 0.05 1.0 0.06 0.5 0.08 (a) Find the variance-covariance matrix & associated with the three stocks. (b) Write down the formulas in order to find the tangency portfolio associated with the three stocks. (Remark: this tangency portfolio is only constructed using the three stocks, and therefore not the market portfolio mentioned above.)