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 9% on this portfolio , would you invest in this portfolio? Explain? 2. Assume the CAPM correctly prices risk, is the market portfolio efficient? Explain why.
the volatility of the market portfolio is 10% and is has an expect return of 8%.. The risk free rate is 3%