To set up an optimal portfolio problem considering transactions costs, we need to adjust the expected return of stocks and calculate the transactions-cost-adjusted expected return. Suppose that a $1 transaction creates 5 cents in transactions costs.

(a) If stock As monthly expected return is 1%, what would be the monthly transactions-cost-adjusted expected return?

(b) If stock As annual expected return is 15%, what would be the annual transactions-cost-adjusted expected return?

(c) Explain why we would subtract the same percentage from the expected return to account for the transactions cost regardless of whether the return is monthly or annual.