Problem 2: (25 points) (No credits for just answers without showing the work! So, show your work!)

After graduating from Florida, A&M University, you have decided to start your own farm. You are considering three potential options: (1) beef cattle production, (2) grow vegetables, or (3) cultivate citrus trees. All three require an investment of $100,000. The resulting profits for each option over the last 5 years are displayed in Table A below:

Table A: Investment Options

	Option 1	Option 2	Option 3
Year 1	$15 000	$45 000	$50 000
Year 2	50 000	40 000	65 000
Year 3	35 000	35 000	40 000
Year 4	25 000	25 000	20 000
Year 5	55 000	15 000	50 000

a. What option is the riskiest one? Why? (2.5 points)

b. Suppose that instead of investing in a single option, you decide to have a portfolio constituted of options 1 and 3 and you want to invest 40% and 60% of your wealth in options 1 and 3, respectively. Calculate the expected value and the risk level associated with this portfolio. (Do not forget to calculate the covariance). (10 points)

c. Suppose you decide to have a portfolio constituted of options 1, 2, and 3 and you want to invest 25%, 50%, and 25% of your wealth in options 1, 2, and 3, respectively. Calculate the expected value and the risk level associated with this portfolio. (12.5 points).