1. (35%) You have identified two securities, A and B, that you believe are mispriced. You have estimated that a of stock A to be 5%, its B to be 1,2 and the firm specific error term to have a standard deviation of 30%. You have estimated the a of stock B to be -4%, its B to be 1,4 and the firm specific error term to have a standard deviation of 40%. The market index fund has an expected return of 12% and standard deviation of 15%. The risk-free rate is 6%. Take advantage of the mispricing you have found and find an optimal risky portfolio that consist of the index portfolio and the mispriced securities. Use both the Markowitz model and the Treynor-Black model (procedure). What will be the expected return and standard deviation of the optimal risky portfolio? What is the Sharpe ratio of the risky portfolio and how does it compare to the Sharpe ratio of the index fund. 1. (35%) You have identified two securities, A and B, that you believe are mispriced. You have estimated that a of stock A to be 5%, its B to be 1,2 and the firm specific error term to have a standard deviation of 30%. You have estimated the a of stock B to be -4%, its B to be 1,4 and the firm specific error term to have a standard deviation of 40%. The market index fund has an expected return of 12% and standard deviation of 15%. The risk-free rate is 6%. Take advantage of the mispricing you have found and find an optimal risky portfolio that consist of the index portfolio and the mispriced securities. Use both the Markowitz model and the Treynor-Black model (procedure). What will be the expected return and standard deviation of the optimal risky portfolio? What is the Sharpe ratio of the risky portfolio and how does it compare to the Sharpe ratio of the index fund