Use the Table Below to Answer the Following Question(s)

question 30

Multiple Choice

Use the table below to answer the following question(s) .
Jonathan Reese is considering three stocks in which to invest with a fixed budget.The table below provides information on Jonathan's expected returns for each stock.The table also provides information, collected from market researchers, on the variance-covariance matrix of the individual stocks.He expects a total return of at least 10%.

Develop a quadratic optimization model to find the optimal allocation of the budget to each stock, and variance calculations for squared terms and cross-products based on the variance-covariance matrix.
-According to the model, what is the cross-product value for Stock 3 variance?

• A)0.00049
• B)0.00283
• C)-0.00047
• D)0.00074

---

Definitions:

Short Sell

The practice of selling a borrowed security with the intention of buying it back later at a lower price to profit from the price difference.

Arbitrage Pricing Theory

A financial model that estimates the return of an asset by considering multiple risk factors and their respective risk premiums, excluding unsystematic risk through diversification.

Nonsystematic Risk

The risk associated with a specific issuer of a security, also known as idiosyncratic or unsystematic risk, that can be reduced through diversification.

Well-Diversified Portfolio

An investment portfolio that includes a mix of assets (e.g., stocks, bonds, real estate) to reduce risk through diversification.