A Japanese investor is holding the Nikkei 225 index, which is her version of the market.

She thinks that three stocks, P, Q, and R, which are not in the Nikkei 225, are undervalued and should form a part of her portfolio. She has the following information about the stocks, the Nikkei 225, and the risk-free rate (the information is given as expected return, standard deviation, and beta):

P: 15%, 30%, 1.5 Q: 18%, 25%, 1.2 R: 16%, 23%, 1.1 Nikkei 225: 12%, 18%, 1.0 Risk-free rate: 2%, 0%, 0.0 1. Calculate Jensen’s alpha for P, Q, and R.

2. Calculate nonsystematic variance for P, Q, and R.

3. Should any of the three stocks be included in the portfolio? If so, which stock should have the highest weight in the portfolio?