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1. (45 pts) Consider an investment environment consisting of two stock portfolios with the following information: Canada (C United States (US) Mean E(r) 0.13 0.159 St.Dov. σ 0.1512 0.241 Correlation Coefficient: 0.48, Risk-free rate: 6% (a) (20 pts) Compute the weights for the optimal risky portfolio. Caleulate its Expected return and variance. (b(5 pts) What is the slope of the Captal Allocation Line (CAL) in this environment? (c) (20 pts) Suppose you are an investor with risk aversion coellicient A 5. You are only allowed to invest in Canada, US and the risk-froe asset. What would be the proportion invested in Canadian stock portfolio, US stock portfolio and the riskless asset?

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Covariance matrix Canada United states 0.0229 0.0175 0.0175 0.0581 and STD Rcturn Canada United states Covariance correlation coefficnent Risk free Risk Aversinn United states Canada bx STD Slope T-bills 15.12% 24. 1U% 0.01749 0.4800 6.00% 5.00 30.80%, 13.00% 15. yU% 13.89% 13.57 0.5818 14.22 return Porttolia 0.86 26.42% United states Canada

8 Covariance matriX 6 Canada 7 United states SB$9 SB$10 $B$12 -B9A2 SB$9*$B$10 SBS12 STD 0.1512 0.241 -812B9B10 81042 Return 0.13 0.159 9 Canada 10 United states 11 Covariance 12 correlation coefficnent 0.48 13 Risk free 14 Risk Aversion 15 United states 16 Canada 17 Expected return 18 STD 19 Slope 20 T-bills 21 22 Portfolio 23 United states 24 Canada 25 0.06 C10-B13) B912)-((C9-B13) B11)/((C10-B13)*B9A2)+(C9-B13) B1042-((C10-B13+C9-B13) B11 -1-B15 -815C10)HB16*C9) -((B15A2 B1062)+(B16A2 B9A2)+(2*B15 B16 B12 B9 B10))40.5 (B17-B13)/B18 -1-B22 (B17-B13)/(B14 B1842) -(B15 B22 -(B16 B22) B24+B23+B20

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