Question 2 (8 Marks). Mary is holding a portfolio that contains 33% of Stock A and 67% of Stock B. The expected annual returns of Stock A and Stock B, and their covariance matrix are given below: A B Stock E(R) 16.18% 12.33% Covariance Matrix A 0.3 0.12 A B 0.12 B 0.10 Mary is considering adding Stock C into her portfolio. Suppose that only yearly stock price data is available. Stock C's prices over the past 4 years are given below, along with the index values of a market index over the past 4 years. The beta of Stock A with respect to this market index is 1.4 and the beta of Stock B with respect to this market index is 0.85. Year 1 Price of Stock C Market Index 18 980 2 23 1300 3 18 1250 4 30 1400 Required: a) What is the correlation coefficient between Stock A and Stock B? (2 marks) b) If Mary borrows an amount of 50% of her own money at 5% and form a portfolio of 30% of Stock A, 30% of Stock B and 40% of Stock C, what is the expected return from the new portfolio? (6 marks) Question 2 (8 Marks). Mary is holding a portfolio that contains 33% of Stock A and 67% of Stock B. The expected annual returns of Stock A and Stock B, and their covariance matrix are given below: A B Stock E(R) 16.18% 12.33% Covariance Matrix A 0.3 0.12 A B 0.12 B 0.10 Mary is considering adding Stock C into her portfolio. Suppose that only yearly stock price data is available. Stock C's prices over the past 4 years are given below, along with the index values of a market index over the past 4 years. The beta of Stock A with respect to this market index is 1.4 and the beta of Stock B with respect to this market index is 0.85. Year 1 Price of Stock C Market Index 18 980 2 23 1300 3 18 1250 4 30 1400 Required: a) What is the correlation coefficient between Stock A and Stock B? (2 marks) b) If Mary borrows an amount of 50% of her own money at 5% and form a portfolio of 30% of Stock A, 30% of Stock B and 40% of Stock C, what is the expected return from the new portfolio? (6 marks)