Question

Given three securities:
Expected Standard Correlations of Returns
Return Deviation Stock 1 Stock 2 Stock 3
Stock 1 0.15 0.20 1.00 0.20 0.30
Stock 2 0.20 0.30 1.00 0.80
Stock 3 0.08 0.10 1.00
(a) Find the expected return and standard deviation of a portfolio with 25% in stock
1, 50% in stock 2, and 25% in stock 3.
(b) For the portfolio in part (a), find the covariance of its return with the return of an
equally weighted portfolio of stocks 1 and 2.
(c) Suppose the risk-free rate is 5%. Someone claims you that an equally weighted
portfolio of Stocks 1 to 3 is the tangency portfolio of these three stocks. Do you
believe his claim? Justify your answer.