You have information on several possible investments as laid out in the table below. A, B, and C are individual risky securities. For now, assume these are the only these 3 risky investments that comprise the market. F is the risk-free asset. M is the market portfolio. All returns are annual returns.

Correclation Matrix (A,B,C,F,M)

Investment	E(ri)	Standard deviation (Sigma i)	A	B	C	D	E
A	19.20%	36	1.0000	0.7000	0.6000	0.0000	0.5
B	21.90%	35		1.0000	0.5000	0.0000	0.6
C	12.00%	25			1.0000	0.0000	0.4
F	3.00%	0				1.0000	0
M	12.00%	10					1

Answer the following questions with respect to this investment information:

a. Using the correlation matrix, compute the covariance of asset A with the market. (1 mark)

b. Using the correlation matrix, compute the beta of asset C. (1 mark)

c. What is the expected excess return of B according to the Capital Asset Pricing Model (CAPM)? Is security B priced correctly, undervalued or overvalued? (2mark)

d. Suppose the risk free rate is 5%, how much of security F is included in the market portfolio M? Briefly explain. (1 mark)

e. Suppose the market capitalization of asset B is $10M and the total market capitalization if $1,000M. If you invest $1M in the market portfolio, how many dollars are you investing in asset B? (1 mark)

f. You have $100,000 to invest. You would like use a combination of M and F to obtain a standard deviation of 4% on your overall portfolio. How much (in dollars) do you invest in F if you choose the most efficient portfolio possible? (1 mark)

g. Suppose the market capitalization of asset C is $500M and the total market capitalization if $1,000M. You have $100,000 to invest. You would like to find a combination of all the securities in the market and F to obtain a standard deviation of 8% on your overall portfolio. How much (in dollars) do you invest in asset C if you choose the most efficient portfolio possible? (1 mark)

h. You have $100,000 to invest. What is the maximum Sharp ratio you can obtain on a portfolio? (1 mark)

i. Suppose 3 additional firms issue shares of equity, so that now there are a total of 6 risky assets. The new assets are negatively correlated with A, B and C. Relative to the previous question, would the maximum Sharp ratio in this new economy be higher or lower? Briefly Explain. (2 marks)

j. A new security has expected return equal to 18.20% and the same beta of as security A. What is the alpha of the security? Does this security lie on the security market line? Briefly explain. (2 marks).