Problem 1 For the following problem please refer to Table 1 Table 1: Historical Annual Volatilities and Correlations for Selected Stocks (based on monthly returns, 1996-2008). Volatility (StDev) Correlation with: Microsoft Dell Alaska Air Southwest Airlines Ford Motor General Motors General Mills Microsoft Dell 37% 50% 1.00 0.62 0.62 1.00 0.25 0.19 0.23 0.21 0.26 0.31 0.23 0.28 0.10 0.07 Alaskan Air 38% 0.25 0.19 1.00 0.30 0.16 0.13 0.11 Southwest Ford General General Airlines Motor Motors 31% 42% 41% 0.23 0.26 0.21 0.31 0.30 0.16 1.00 0.25 0.25 1.00 0.22 0.62 0.20 0.07 0.23 0.28 0.13 0.22 0.62 1.00 0.02 (a) What is the covariance between the returns for Alaskan Air and General Mills? (b) What is the volatility of a portfolio with i. equal amounts invested in these two stocks? ii. 20% invested in Alaskan Air and 80% invested in General Mills? iii. 80% invested in Alaskan Air and 20% invested in General Mills? Mills 18% 0.10 0.07 0.11 0.20 0.07 0.02 1.00

For the following problem please refer to Table 1 Table 1: Historical Annual Volatilities and Correlations for Selected Stocks (based on monthly returns, 1996-2008). (a) What is the covariance between the returns for Alaskan Air and General Mills? (b) What is the volatility of a portfolio with i. equal amounts invested in these two stocks? ii. 20% invested in Alaskan Air and 80% invested in General Mills? iii. 80% invested in Alaskan Air and 20% invested in General Mills