QUESTION FOUR

You wish to construct a two asset portfolio and you are presented with the following information with regards to the three stocks available. The Treasury Bill return id 0.25% per annum.

	Return	Volatility	Correlation	Covariance
A	17.5%	-	rAB= -0.1639	COVAB= -48.7422
B	5.5%	11.5%	-	COVBC= -5.7579
C	0.5%	4.56%	rAC= 0.2441	-

1. Calculate the three missing values in the above table. (6 MARKS)

2. Construct the Security Market Line (SML) clearly labelling the above three stocks. (5 MARKS)

3. Show the effect on the above constructed SML in part B if investors are expected to become more risk averse. (3 MARKS)

4. Given your answers which of the following portfolios would you select:

1. Portfolio A and B

2. Portfolio B and C

3. Portfolio A and C