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You are considering three stocks.  Stock A has an expected return of 5%.  Stock B has an expected...

  1. You are considering three stocks.  Stock A has an expected return of 5%.  Stock B has an expected return of 12%.  Stock C has an expected return of 16%.  You have the following variance-covariance matrix.

Stock A

Stock B

Stock C

Stock A

.070

.050

-.060

Stock B

.050

.100

-.025

Stock C

-.060

-.025

.170

  1. Calculate the expected return and portfolio variance assuming you invest $100,000 in stock A, $200,000 in stock B, and $300,000 in stock C.
  2. How does this answer in (A) compare to investing in stock B alone?
  3. Calculate the expected return and portfolio variance assuming you invest $200,000 in each stock.
  4. Explain the difference between your answers in (A) and in (C).
  5. Now assume that, in addition to the above investments in (A), you invest an additional $400,000 in long-term Treasury securities earning 4%.  Calculate the expected return and variance of this 4-security portfolio worth $1,000,000.
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