Suppose stock A=IBM, stock B=Coca Cola and stock C=NRG. Let rA denotes the return of IBM stock, rB denotes the return of Coca Cola stock and rC denotes the return of NRG stock, respectively; σ 2 A denotes the variance of return of IBM, σ 2 B denotes the variance of return of Coca Cola stock and σ 2 C denotes the variance of return of NRG, respectively. We consider the following FOUR possible portfolios: Portfolio 1: 20% stock A and 80% stock B; Portfolio 2: 80% stock B and 20% stock C; Portfolio 3: 50% stock A and 45% stock B and 5% Treasury Bill; Portfolio 4: 60% stock A and 30% stock C and 10% Treasury Bill (Let assume Treasury Bill is independent of other three stocks); (a) Derive the expected value and variance of all four portfolios (show all workings); For example, E(P ortfolio 9) = E(axA + cxC ), = E(axA) + E(cxC ), = aE(xA) + cE(xC ).

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Portfolio 1 20 stock A and 80 stock B W1Weight of Stock A02 W2Weight of Stock B08 Expected Return of ... View the full answer