Question 4

QUESTION FOUR (15 MARKS) a) Consider the following expected returns, volatilities, and correlations: Stock Expected Stand Correlation with Correlation Return Deviation Duke Energy with Microsoft DUKE ENERGY 14% 6% 1.0 -1.0 Correlation with Wal-Mark Rec 0.0 Microsoft 44% 24% -1.0 1.0 0.7 Wal-Mart 23% 14% 0.0 0.7 1.0 i) Consider a portfolio consisting of only Duke Energy and Microsoft . What is the percentage of your investment (portfolio weight) that you would place in Duke Energy stock to achieve a risk-free investment? ii) What is the expected return of a portfolio that is equally invested in Duke Energy and Microsoft? iii) What is the volatility of a portfolio that is equally invested in Duke Energy and Microsoft? iv) What is the expected return of a portfolio that consists of a long position of $10,000 in Wal- Mart and a short position of $2000 in Microsoft? a a