# Answer to Question #71005 in Finance for Nick Mango

Question #71005

Given three securities:

Expected Standard Correlations of Returns

Return Deviation Stock 1 Stock 2 Stock 3

Stock 1 0.15 0.20 1.00 0.20 0.30

Stock 2 0.20 0.30 1.00 0.80

Stock 3 0.08 0.10 1.00

(a) Find the expected return and standard deviation of a portfolio with 25% in stock

1, 50% in stock 2, and 25% in stock 3.

(b) For the portfolio in part (a), find the covariance of its return with the return of an

equally weighted portfolio of stocks 1 and 2.

(c) Suppose the risk-free rate is 5%. Someone claims you that an equally weighted

portfolio of Stocks 1 to 3 is the tangency portfolio of these three stocks. Do you

believe his claim? Justify your answer.

Expected Standard Correlations of Returns

Return Deviation Stock 1 Stock 2 Stock 3

Stock 1 0.15 0.20 1.00 0.20 0.30

Stock 2 0.20 0.30 1.00 0.80

Stock 3 0.08 0.10 1.00

(a) Find the expected return and standard deviation of a portfolio with 25% in stock

1, 50% in stock 2, and 25% in stock 3.

(b) For the portfolio in part (a), find the covariance of its return with the return of an

equally weighted portfolio of stocks 1 and 2.

(c) Suppose the risk-free rate is 5%. Someone claims you that an equally weighted

portfolio of Stocks 1 to 3 is the tangency portfolio of these three stocks. Do you

believe his claim? Justify your answer.

Expert's answer

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