1. A portfolio manager provides recommendations to her clients. Her research department has prepared the following information for her:

Portfolio	Forecasted Return	std dev
Stock X	10.0%	5%
Stock Y	15.0%	12%
Risk-free	5.0%	0%

a. Which stock should an investor hold? Could you explain your answers?

b. Draw the Capital Allocation Line of Stock X and Stock Y in one xy-coordinate system.

E(r_i)

(r_i)

2. An industrial firm has a beta of 1.1. Based on historical data you estimate the market risk premium to be 8.5% and the current risk-free rate is 3%. Using the CAPM, what is the expected return on the stock for this industrial firm?

3. You estimate that the expected return on a retailing firms stock is 10%. Based on historical data you estimate the market risk premium to be 5% and the current risk-free rate is 5%. What is its beta?