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Problem 4. Your uncle, has asked you for some financial advice. His retirement savings are currently invested as follows: $20,000 in the riskless asset, $40,000 in GM stock, and $40,000 in Microsoft stock. He wants to know if this is a sensible portfolio. You decide to analyze it based on the CAPM model. You look in a Beta Book and find that GM stock has a Beta of 1.1. 60% of the variance of GM's return is idiosyncratic. Microsoft stock has a Beta of 0.8, and 70% of its variance is idiosyncratic. Suppose further that the correlation between the return to GM stock and the return to Microsoft stock is 0.3. (a) If rs is 4% and the expected excess return on the market (E(Tm) - rol is 6%, what is the expected return on his portfolio? (b) If the market return has a standard deviation of 20%, compute the variance and standard deviation of his current portfolio. Assume that the CAPM is correct. (c) Assuming that the CAPM is correct, find an efficient portfolio consisting of the riskless asset and the market portfolio that has the same return standard deviation as your Uncle's 2 current portfolio. What is the erpected return on this portfolio? How does it compare to the expected return of his current portfolio? (d) Would you recommend that your uncle invests in the portfolio from Part (c)

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