QUESTION 3

The next three questions involve stocks A and B which have the following characteristics: A B Covariance of stocks return with the market .03 .01 Standard deviation of the stock's returns .15 .30 Correlation between returns of A and B .25 Standard deviation of the market .18 Expected rate of return of the market 8% Risk free rate of interest 1% a) If you are a fully diversified investor, does buying A or B involve more risk?

b) What is the expected return of a portfolio of 70% of A and 30% of B. See stock characteristics above. Put you answer in decimal (not percentage) terms