Suppose you are a head of a hedge fund and are thinking to create a portfolio investing just in these three stocks. The portfolio weights, volatility and correlation with the market portfolio of the three stocks are given in the table below:
|
Portfolio Weight
|
Volatility
|
Correlation with the Market Portfolio
|
|
Yahoo
|
0.25
|
12%
|
0.4
|
|
Microsoft
|
0.35
|
25%
|
0.6
|
|
Google
|
0.4
|
13%
|
0.5
|
|
|
|
|
|
|
|
|
1. If you expect to receive a rate of return of 9% on this portfolio, would you invest in this portfolio? Explain. Show Your work
2. Assume the CAPM correctly prices risk, is the market portfolio efficient? Explain why.