The following information is available on the percentage rates of return on various assets for the last three years. You determine that this is a sample which is representative of the data population for these securities.

Security Year 1 Year 2 Year 3

Share A 6% 18% 60%

Share B 32% 22% 35%

Market 50% 10% 20%

Government Bonds 10% 10% 10%

(a) Consider only shares A and B for this part. Compute the portfolio weights that yield the portfolio of A and B which has the lowest possible standard deviation. Then compute that portfolios expected return and standard deviation. Hint: Write down the formula for this, then compute all the ingredients you require.

(b) What is the numerical equation for the Capital Markets Line in this situation?

(c) Do shares A and B plot on the Securities Market Line? Hint: you will have to determine Betas in order to figure this out.