The following information is available on the percentage rates of return on various assets for the last three years.

1. The following information is available on the percentage rates of return on various assets for the last three years. You determine that this is a sample which is representative of the data population for these securities.


Share A

Share B

Market Government Bonds

Year 1−6% 32%

Year 2−18%−22%

Year 3 60% 35% 20% 10%

50% −10% 10% 10%

  1. (a) Consider only shares A and B for this part. Compute the portfolio weights that yield the portfolio of A and B which has the lowest possible standard deviation. Then compute that portfolio’s expected return and standard deviation. Hint: Write down the formula for this, then compute all the ingredients you require.
  2. (b) What is the numerical equation for the Capital Markets Line in this situation?
  3. (c) Do shares A and B plot on the Securities Market Line? Hint: you will have to determine Betas in order to figure this out.

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