Question 5a

Question 5 (12 marks}: a) You have combined nvo stocks, ABC and DEF, into an equally weighted portfolio (Stable) and it has a variance of 35%. The covariance between ABC and DEF is 25%. ABC is a resource stock and has a variance twice that of DEF. You have formed another portfolio (Growth) that has an expected return of 13%. and a variance of 50%. The expected return on the market is 15% and the risk free rate is 7% Covariance {ABC,Market) = 22% and Covariance {DEF,Market) = 15.5% and the variance of the Market is 15%. Required: i. What is the variance of ABC? (3 marks) ii. What is the correlation of ABC with DEF? (2 marks) iii. Is your Stable portfolio efficient? Explain. (2 marks)