The question in pictures

Consider the following information.

Standard deviation of return on the market is 15%
Expected market return is 15%
Risk free rate is 5%
Correlation coefficient of return between stock A and stock B is 0.60 Correlation coefficient of return between stock A and stock C is 0.40 Correlation coefficient of return between stock B and stock C is 0.20

1. (i)  Calculate expected return for stock A, stock B and stock C.

2. (ii)  Calculate the expected return and standard deviation of a portfolio which invests one-third in stock A, one-third in stock B, and one-third in stock C.

3. (iii)  Calculate the expected return and standard deviation of a portfolio which invests one-third in the risk free asset, one-third in stock B, and one-third in stock C.

4. (iv)  Calculate the expected return and standard deviation of a portfolio which invests 50% in stock B, and 50% in stock C. The investor puts up only 50% of the total amount and borrows the balance from the broker at the risk free rate.

5. (v)  Compare your answers to (ii), (iii) and (iv) and recommend which portfolio you would prefer giving reasons.