Use the table for the question(s) below. (19.5 points)

Consider the following expected returns, volatilities, and correlations:

Stock Expected Standard Correlation with Correlation with Correlation with

Return Deviation Duke Energy Microsoft Wal-Mart

Duke Energy 15% 6% 1.0 -1.0 0.0

Microsoft 34% 24% -1.0 1.0 0.75

Wal-Mart 23% 13% 0.0 0.75 1.0

I. Consider a portfolio consisting of only Duke Energy and Microsoft. Suppose you would place in Duke Energy stock to achieve a risk-free investment. What would be the percentage of your investment (portfolio weight)?

II. What are the expected return and the volatility of a portfolio that is equally invested in Duke Energy and Microsoft?

III. What are the expected return and the volatility of a portfolio that consists of a long position of $13,000 in Wal-Mart and a short position of $2000 in Microsoft?

IV. Consider a portfolio consisting of only Microsoft and Wal-Mart stock. Calculate the expected return and the volatility on such a portfolio when the weight on Microsoft stock is 0%, 25%, 50%, 75%, and 100%.

V. Draw the efficient frontier and how does it change when more stocks are used to construct portfolios?

VI. What would be the efficient frontier when adding a riskless asset with a return of 2%? Show in a graph.