Your portfolio has consisted of a single stock, IBM, which you inherited from your grandmother. You realize that such a portfolio is not diversified and you would like to start on the path to fiscal stability. You are going to purchase Proctor & Gamble stock as a step in the right direction toward diversification. IBM has an annualized standard deviation of 0.54 and P&G 0.28. The correlation coefficient between the two stocks is 0.65. IBM has a beta of 1.1 and P&G 0.6. You are also considering investing in a 10 year Treasury bond that has a yield to maturity of 3.15%. This Treasury bond has a semi-annual coupon rate of 2.85% and a face value of $10,000. The market risk premium is 5.2%.

Part a. If you choose a portfolio that is 70% invested in IBM and 30% invested in P&G stock, what are the portfolio return and standard deviation?

Part b. What price should you pay for the Treasury bond if you choose to invest in it?

Part c. Suppose you create a portfolio of 50% IBM stock, 30% P&G and 20% Treasury bond. What are the beta and expected return of this portfolio?