Suppose there are three stocks A, B, and C

Suppose there are three stocks A, B, and C. Based on historical data, you have esti- mated the following information about each stock. Stock OE A 2% 2 10% B 3% 1 20% C 1% 1.5 10% where of is the idiosynchratic volatility. Assume that both the expected return and standard deviation of the market portfolio is 15%. The return of the riskless asset is 5%. (a) Given the data above, what is the expected return of each of the three stocks? (b) Suppose Cov(e;, E;) = 0 for i / j and i, j E {A, B, C}, compute the covariance matrix between the 3 stocks and market portfolio. (c) Using the results you obtained in parts (b) and (c), what is the optimal combination of the 4 risky assets (A, B, C, and the market portfolio)?