Question 2 (13 marks) - Risk and Return and Portfolio Theory You have information on several possible investments as laid out in the table below. A, B, and C are individual risky securities. For now, assume these are the only 3 risky investments that comprise the market. F is the risk-free asset. M is the market portfolio. All returns are annual returns. Correlation Matrix Investment 0 A B C F M E(r.) 19.20% A 36% 1.0000 0.7000 0.6000 0.0000 0.5 B 21.90% 35% 1.0000 0.5000 0.0000 0.6 C 12.00% 25% 1.0000 0.0000 0.4 F 3.00% 0% 1.0000 0.0 M 12.00% 10% 1.0 Answer the following questions with respect to this investment information: (a) Calculate the correlation between Stock A and Market. (2 mark) (b) Assume that you want to form a portfolio that consist of a long position of $18,000 in asset C and a short position of $6,000 in asset A. What is the expected return and risk of this portfolio? (3 marks) (c) You have $100,000 to invest. You would like to use a combination of M and F to obtain a standard deviation of 4% on your overall portfolio. How much (in dollars) do you invest in F if you choose the most efficient portfolio possible? What is the return of this portfolio? (3 mark) (d) You have $100,000 to invest. What is the maximum Sharp ratio you can obtain on a portfolio? Show the calculation. (2 mark) (e) Suppose 3 additional firms issue shares of equity, so that now there are a total of 6 risky assets. The new assets are negatively correlated with A, B and C. Relative to the previous question, would the maximum Sharpe ratio in this new economy be higher or lower? Briefly Explain