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  3. 4) you form two risky portfolios a and b by invest

4) You form two risky portfolios A and B by investing in Stocks D, E,...

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4) You form two risky portfolios A and B by investing in Stocks D, E, and F. a) You invest 1/2 of your money in Stock D and 1/2 in Stock E. The correlation between Stock D and Stock E is 0.5 while the standard deviation of Stock D is 40% and the standard deviation of Stock E is 20%. Figure out the standard deviation and the expected return of the risky portfolio A. (Please use the expected return for Stock E calculated at Question 3)-a) above.) (25points) b) You invest 1/8 of your money in Stock E and 7/8 in Stock F. The correlation between Stock E and Stock Fis 0.8 while the standard deviation of Stock Eis 20% and the standard deviation of Stock F is 25%. Figure out the standard deviation and the expected return of the risky portfolio B. (Please use the expected return for Stocks E and F calculated at Question 3)-a) & b) above.) (25points) c) Given the risk-free rate of 3%, figure out the Sharpe ratio for Portfolios A and B and choose a better portfolio (10points) Security Beta Standard Deviation Expected return S&P 500 1.0 15% 9.0% Risk-free security 0.0 0% 3.0% Stock D 40% 12.0% Stock E 0.8 20% (78) Stock F 1.2 25% (18.2)%

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