1. An investor wishes to construct a portfolio consisting of a 70% allocation to a stock index and a 30% allocation to a risk free asset. The return on the risk-free asset is 4.5% and the expected return on the stock index is 12%. Calculate the expected return on the portfolio

2. Consider a risky asset that has a standard deviation of returns of 15. Calculate the correlation between the risky asset and a risk free asset.

3. CHOOSE THE CORRECT ANS.

3. A stock has a beta of the stock is 1.25. The risk free rate is 5% and the return on the market is 6%. The estimated return for the stock is 14%. According to the CAPM you should

   1. Sell because it is overvalued.

   2. Sell because it is undervalued.

   3. Buy because it overvalued.

   4. Buy because it is undervalued.

   5. Short because it is undervalued.