2.Given the information in the table below, an equally weighted portfolio of stocks A, B, and C has a standard deviation equal to 10% (10 points)Stock Expected Return Standard Deviation Correlation with A Correlation with B Correlation with C A 12% 10% B 12% 10% C 12% 10% 0 1 0 1 0 1

3 SECTION II: TIME AND MONEY…BUT NOT THE PINK FLOYD SONGS Questions 3-6 (40 points total) An anonymous donor wants to contribute to the Statler and Waldorf Foundation (SWF). The SWF helps to find heckling jobs for older, out of work, down on their luck puppets. The donor wants to begin making annual donations to the SWF starting exactly 25 years from today. She intends to finance her philanthropy by making monthly deposits starting one month from today into a savings account which earns 6% (APR), compounded monthly. This rate is guaranteed until she dies. The monthly deposits will stop 25 years from today when she makes her first donation to SWF. She wants the first donation (again, made 25 years from today) to be for $10,000 and would like the annual gifts to grow by 5% each year until her death. Furthermore, as her final wish, upon her death, she wants to leave enough to the SWF that the organization will be able to withdraw annual payments of $20,000 forever, even if interest rates fall to 4% (APR), compounded annually. Assume that the donor will die exactly 50 years from today. That date will also be the last payment of the growing donations. The SWF will not begin withdrawing the $20,000 annually until one year after that (51 years from today). Then, every year from then on, on the anniversary of her death, the SWF will withdraw the $20,000 payment. 3.Until she dies, what is the effective annual rate of the donor’s savings account? (10 points)

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