) Your client is considering three stocks:

Stock	A	B	C
Standard Deviation	22%	18%	16%
Expected Return	12%	7%	5%

The correlations among these three securities are:

Stock	A	B	C
A	1.00	0.75	0.50
B		1.00	0.25
C			1.00

You and your client also note that the risk free rate is 2%.

Your client has asked you to analyze the following potential portfolios.

Portfolio 1: Equally weighted portfolio of stocks A and B

Portfolio 2: Equally weighted portfolio of stocks B and C

Portfolio 3: Equally weighted portfolio of stocks A and C

Your client has asked you to calculate the expected return and standard deviation of the three potential portfolios. You agree to do so, but you would also like to demonstrate to your client that there is a superior expected return for each of the potential portfolios under consideration (same risk but higher returns). You will call these portfolios S1, S2, and S3. In fact, you would like to show your client that there is an optimal risky portfolio they should consider.

By creating an efficient frontier of investments, show your client there is a better investment option for each of the three portfolios under consideration. Also show your client the risk and expected return of an optimal risky portfolio.

Present your client with a return-risk graph identifying the potential portfolios 1, 2, and 3; the superiorportfolios S1, S2, and S3, and the optimal portfolio. Add a capital allocation line to the graph. If your client has below average risk tolerances, describe qualitatively the portfolio you might suggest building.

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