Question: There are three assets A, B and C. The returns for shares A, B and C over the next year have expected values 9%, 6%,

There are three assets A, B and C. The returns for shares A, B and C over the next year have expected values 9%, 6%, 5% respectively. The standard deviations for A, B and C are 30%, 25% and 20% respectively. The covariance between these A and B is 0.0375, the covariance between A and C is -0.018, the covariance between B and C is -0.03. Ben currently has invested 40%, 40%, 20% in shares A, B and C respectively.

a) Calculate the expected return on Ben's portfolio. Show full working.

b) Calculate the correlations AB,AC,BC. Show full working.

c) Calculate the variance and standard deviation of the return on Ben's portfolio. Show full working.

d) Alice also wants to invest in shares A, B and C, but her risk appetite is higher than Ben. Suggest a weight allocation such that Alice's portfolio will have a higher risk than Ben's portfolio, and explain why. You are NOT required to provide calculations.

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