3. A portfolio manager analyzes 100 stocks and constructs a mean-variance efficient portfolio using these 100 securities. (13 points)

Stock C and D are two of these 100 stocks. The index model for these two stocks is estimated from excess return with the following results:The market index has an expected return of 16% and a standard deviation of 20%. Riskfree rate is 4%.

(c) Calculate alpha values for two stocks. (2 points)

(d) Break down the variance of each stock to the systematic and firm-specific components. (3 points)

(e) What are the covariance and correlation coefficient between the two stocks? (2 points)

(f) What is the covariance between each stock and the market index? (2 points)

StateProbability 0.30 0.50 0.20 Return on Stock Fund A 7% 11% -10% Return on Stock Fund B -9% 20% 26%