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# A portfolio is formed as follows: sell short $2,000 of security 1 and buy $3,000 of security 2, $2,000 of security 3, and $3,000 of security 4. the cash provided by the owner of the portfolio is $2,000, and any additional fund required to finance the portfolio are borrowed at a risk free interest rate of 5 percent. there are

A portfolio is formed as follows: sell short $2,000 of security 1 and buy $3,000 of security 2, $2,000 of security 3, and $3,000 of security 4. the cash provided by the owner of the portfolio is $2,000, and any additional fund required to finance the portfolio are borrowed at a risk free interest rate of 5 percent. there are no restrictions on the use of short sell proceeds.

stock | E(r) | STD DEV | Correlation Coeff. | |

1 | .05 | .20 | 1 with 2 = -.2 | |

2 | .1 | .1 | 1 with 3 = .3 | |

3 | .2 | .15 | 1 with 4 = .5 | |

4 | .15 | .3 | 2 with 3 = .2 | |

2 with 4 = -.5 | ||||

3 with 4 = 0 |

a. Construct the variance covariance matrix

b. Compute the portfolio weights for each component of the portfolio.

c. Compute the expected return of the portfolio.

d. Compute the standard deviation of the portfolio.

**Related Book For**

## Mathematical Applications for the Management Life and Social Sciences

11th edition

Authors: Ronald J. Harshbarger, James J. Reynolds

ISBN: 978-1305108042