Question 5 (12 marks): a) You have combined two stocks, ABC and DEF, into an equally weighted portfolio (Stable) and it has a variance of 35%. The covariance between ABC and DEF is 25%. ABC is a resource stock and has a variance twice that of DEF. You have formed another portfolio (Growth) that has an expected return of 17% and a variance of 50%. The expected return on the market is 15% and the risk free rate is 7% Covariance (ABC,Market) = 22% and Covariance (DEF,Market) = 15.5% and the variance of the Market is 15%. Required: i. What is the variance of ABC? (3 marks) What is the correlation of ABC with DEF? (2 marks) iii. Is your Stable portfolio efficient? Explain. (2 marks) b) You are playing the role of both CEO and CFO for an automobile company. You forecast that the current pandemic (due to COVID_19) will slide the economy into a deep recession. How can you adjust the company's operating leverage and financial leverage to minimize the adverse effect of the recession on your company? (2 marks) c) Considering the following information regarding the performance of a portfolio manager in a recent quarter, (i) identify the Alpha of the manager's portfolio compared to benchmark (ii) identify the contributions of asset allocation and security selection to relative performance. Manager's Manager's Benchmark Benchmark Return Weight weight Return Stocks 1% 0.50 0.30 2% Bonds 2% 0.30 0.30 1.5% Treasury bills 0.75% 0.20 0.40 0.5%