The following information about the mean returns and covariances for three stocks.

Covariance with:

Stock             AOL       Microsoft      Intel       Mean Return

AOL        .002       .001      0      15%

Microsoft       .001      .002        .001        12%

Intel    0    .001        .002        10%

Compute the tangency portfolio weights assuming a risk-free asset yields 5 percent. How does your answer change if the risk-free rate is 3 percent? 7 percent? Draw a mean-standard deviation diagram and plot AOL, Microsoft, and Intel on this diagram as well as the three tangency portfolios found here.

Galehouse Gas Stations Inc. expects sales to increase from $1,610,000 to $1,810,000 next year. Mr. Galehouse believes that net assets (Assets − Liabilities) will represent 40 percent of sales. His firm has an 7 percent return on sales and pays 60 percent of profits out as dividends. (Input all amounts as positive values.)

a. What effect will this growth have on funds?

The cash balance will increase or decrease by $ .

b. If the dividend payout is only 35 percent, what effect will this growth have on funds?

The cash balance will increase or decrease by $ .