1. (11 points) The table below presents the returns on stocks ABC and XYZ for a

five-year period.

YEAR	ABC	XYZ
1	.16	.12
2	.42	.62
3	-.02	-.23
4	-.26	-.62
5	.48	.52

AVG	.16	.08
STD	.31	.52

a. (4 points) Assume that the average returns from the data equals the expected

returns for the respective stocks. If you want to form a portfolio with expected

returns of 20%, what proportion of your assets would you invest in each of these

stocks?

b. (4 points) What is the standard deviation of this portfolio? Remember to

implement the degree of freedom adjustment (dividing by T-1) when computing

variances and covariances.

c. (3 points) Suppose the risk-free rate is 6%. Compute the slope of the capital

allocation lines for ABC and XYZ. Which of these two stocks yields a higher

reward-to-risk ratio?