the third and fourth pictures are more information thats needed for the question on picture 3.

Consider the following properties of the return of stock 1, of stock 2 and of the market (m): 01 = 0.20, P1m = 0.4 02 = 0.30, P2,m = 0.7 Om = 0.15, E(rm) = 0.10 Suppose further that the risk free rate is 5%. 9(c). Assume that the Capital Asset Pricing Model is valid. How could you construct a new portfolio using the market portfolio and the risk-free asset that has the same expected return as the portfolio you considered in part 4(b) but has the lowest standard deviation? What is the standard deviation of the return of this portfolio? B D E 0.15 0.10 5% 0.20 0.40 0.30 0.70 22 Standard deviation Market 23 Return Market 24 Risk free rate 25 Standard deviation Stock 1 26 Correlation (1.M) 27 Standard deviation Stock 2 28 Correlation (2,M) 29 30 31 32 Beta 33 Beta - Correlation(stock market) "SD stock/SD market 34 35 CAPM return 36 (Risk free rate+Beta "(Market return-Risk free rate) Stock 1 Stock 2 0.53333 1.40 7.67% 12.00% tround to 2 decimal places) 27 Calculation- B D 22 Standard deviation Market 0.15 23 Return Market 0.1 24 Risk free rate 0.05 25 Standard deviation Stock 1 0.2 26 Correlation (1,M) 0.4 27 Standard deviation Stock 2 0.3 28 Correlation (2,M) 0.7 29 30 Stock 1 Stock 2 31 32 Beta =B26"(B25/822) =B28"(B27/822) 33 Beta - Correlation(stock,market) *SD stock/SD market 34 35 CAPM return =$B$24+B32*($B$23-$B$24) -$B$24+C32*($B$23-$B$24) round to 2 decimal places) 36 (Risk free rate+Beta (Market return-Risk free rate) 27 Weight in Stock 1, W1 = 0.4 Weight in Stock 2, W2 = 0.6 Standard Deviation of Stock 1, S1 = 0.2 Standard devaiton of Stock 2, S2 = 0.3 Correlation coefficient c = = 0.5 Expected Return of Portfolio = ER(1) x W1 + ER(2) x W2 = 7.67 x 0.4 + 12 x 0.6 = 10.248% Portfolio Variance = W12 x 512 + W22 x S22 + 2 x W1 x W2 x 51 x S2 x C = 0.42 x 0.22 + 0.62 x 0.32 + 2 x 0.4 x 0.6 x 0.2 x 0.3 x 0.5 = 0.0532 Portfolio Standard deviation = Variance1/2 = 0.05321/2 = 0.2307