Security	Beta	Standard Deviation	Expected return
S&P 500 Risk-free security Stock D Stock E Stock F	1.0 0.0 ( ) 0.8 1.2	15% 0% 40% 20% 25%	9.0% 3.0% 12.0% ( )% ( )%

1. Figure out the market risk premium based on both S&P 500 and the risk-free security.

2. Figure out a beta for Stock D based on CAPM.

3. You would like to compare Stocks E and F.

1. If Stock E has the average return of 10%, figure out the expected return and the abnormal return, alpha (), for Stock E based on CAPM.

2. If Stock F has the average return of 13%, figure out the expected return and the abnormal return, alpha (), for Stock F based on CAPM.

3. Considering the abnormal returns for Stocks E and F, choose a better stock.

4. You form two risky portfolios A and B by investing in Stocks D, E, and F.

1. You invest 1/2 of your money in Stock D and 1/2 in Stock E. The correlation between Stock D and Stock E is 0.5 while the standard deviation of Stock D is 40% and the standard deviation of Stock E is 20%. Figure out the standard deviation and the expected return of the risky portfolio A. (Please use the expected return for Stock E calculated at Question 3)-a) above.)

2. You invest 1/8 of your money in Stock E and 7/8 in Stock F. The correlation between Stock E and Stock F is 0.8 while the standard deviation of Stock E is 20% and the standard deviation of Stock F is 25%. Figure out the standard deviation and the expected return of the risky portfolio B. (Please use the expected return for Stocks E and F calculated at Question 3)-a) & b) above.)

3. Given the risk-free rate of 3%, figure out the Sharpe ratio for Portfolios A and B and choose a better portfolio.

5. You form a complete portfolio C by investing $8,000 in S&P 500 and $2,000 in the risk-free security. Given the information about S&P 500 and the risk-free security on the table, figure out the following.

5. Figure out the standard deviation of the complete portfolio C.

2. Figure out the slope of the Capital Allocation Line (CAL).

3. Figure out the beta of the complete portfolio C.

6) A complete portfolio is composed of the risk-free security and a risky portfolio, P, constructed with two risky securities, X and Y. The optimal weights of X and Y in P are 40% and 60% respectively. Given the risk-free rate of 4%, X has an expected return of 10%, and Y has an expected return of 20%.

a) Figure out the expected return of the risky portfolio, P.

b) To form a complete portfolio with the expected return of 22%, what are the portfolio weights for the risk-free security and the risky portfolio P, respectively? Explain your transaction to achieve the return of 22%.