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Question 3 (To be completed in Word document and/or Excel document. If you do use Excel to complete the question, please screenshot Excel Answer/formula/table into Word document) (25 Marks) You have $100,000 to invest and are considering investing into two stocks: Tiffany and Co. (TIF), and McDonald's Corporation (MCD). The risk and expected return characteristics of TIF and MCD are as follows: Tiffany and Co McDonald's Corporation (TIF) (MCD) Expected return Beta Standard Deviation 0.32 13% 1.5 7.6% 0.6 0.14 Assume the standard deviation of the return of the market is 19.5%. The correlation coefficient between the returns for TIF and MCD is 0.5. a) What is the expected return and standard deviation of a portfolio invested equally in TIF and MCD? b) Assume there is a risk-free rate with expected return of 4% p.a., what is the expected return and standard deviation of a portfolio invested one third in TIF, one third in MCD and one third in the risk-free rate? =g2 Hint: Three asset portfolio variance formula: Variance3-asset portfolio = (Wx0x)2 + (W,0y)2 + (W203)2 + 2wxW,0 x0yP2, +2wxW,0x0zPx.2 + 2w,W,0,0zPy c) You would like to borrow $50,000 and use the whole proceeds to invest in a portfolio that has 50% of TIF and MCD each. What is the expected return and standard deviation of your new portfolio? Note: assume that the borrowing and lending rate is the same (i.e. the rate that you need to pay when you borrow is also 4% per annum). Hint: Borrowing constitute to a negative weight associated with the risk-free asset. The value of your total portfolio is still 100,000 and all the weights must still sum to 1. d) Comment on the beta of TIF and MCD. You also need to explain why is the beta of TIF is much higher than MCD.(200 words +/- 10%)

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