Your manager asks you to replicate the JP Morgan T-Bond Index using a tracking error minimization approach. You are to replicate this index as closely as possible using a medium duration Treasury bond (M-BOND) and a long duration Treasury bond (L-BOND). These expire in approximately 7.15 years and 29.25 years time respectively. The following variance-covariance matrix, based on daily returns over the preceding six months, is given to you to use in your replication:

	M-Bond	L-Bond	Aggregate-Bond Index
M-Bond	0.0042%	0.0057%	0.0037%
L-Bond	0.0057%	0.0119%	0.0062%
Aggregate-Bond Index	0.0037%	0.0062%	0.0041%

Note: As usual, variances are given on the diagonal, e.g. the variance of M-BOND is 0.0042%. As usual, covariances appear in the non-diagonal elements, e.g. the covariance of M-BOND and L-BOND is 0.0057%.

(a) What is the variance of the replicating portfolio where the weight on M-BOND is 0.70 and the weight on L-BOND is 0.30? (b) What is the covariance of the replicating portfolio (where the weight on M-BOND is 0.70 and the weight on L-BOND is 0.30), with the index?