Portfolio Expected Return

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Consider the following portfolios:

Portfolio Expected Return

Covariance with A

Covariance with B

Covariance with C

A 3% 0.36 -1.44 0 B 11% -1.44 5.76 2.35 C 16% 0 2.35 1.96

a) Find the expected return and volatility of a portfolio that consists of a long position of $8,000 in

portfolio A and a long position of $2000 in portfolio B. b) Given your answer from part a), what is the risk-free rate in this economy? c) When combined with a risk-free investment, which of the three risky portfolios would suit a risk-

averse investor? Which portfolio would a risk-seeking investor choose? d) Suppose an investor had a required return of 20%. Assume the investor can only invest in the

three portfolios (no risk-free bonds are available, but it is possible to short-sell portfolios). What weights (percentages) of A, B and C would give the investor the required return for the lowest risk?

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