What is the alpha of each stock? Compare each stock`s risk-return point graphically and identify each alpha clearly.

a) What is the alpha of each stock? Compare each stock`s risk-return point graphically and identify each alpha clearly.

b) According to the CAPM, which stock is a better buy? Explain your answer.

3. A risk-averse investor has a preference function that may be written as where E[r] is the expected rate of return as.

,E(r) is the portfolio variance and A is the degree of risk aversion which you are told is equal to 1.5. The investor is considering the formation of a portfolio comprising two independent risky assets, A and B, and a risk-free asset, G, that can be lent or borrowed at a constant risk-free rate of 2.5%.

Risky asset A offers a return of 12% and has a standard deviation on return of 4%; risky asset B offers a return of 16% and has a standard deviation on return of 5%.

a) In what proportions should the investor hold his wealth?

b) Using a diagram to illustrate your answer, explain the key element of the method used by the investor to solve the portfolio problem.

4. Suppose that the expected rate of return on an efficient market portfolio is 20% and the rate of return on the risk-free asset is 8%. The standard deviation of the market portfolio is 32%.

a) What is the equation for the Capital Market Line? Explain your answer and interpret this relationship.

b) If an expected rate of return of 17% was required, what is the standard deviation of this position?

c) If you have 1000 to invest, how should you allocate your funds to achieve this position? Explain your answer.

d) If you invest 300 in the risk-free asset and 700 in the market portfolio, what is the expected value of the portfolio at the end of the year?

e) Suppose that an asset with a return of 17% and a standard deviation of 24% exists that is correlated,? = 0.4 with the market. What is the beta of this asset? Interpret your result.