1. Consider the following properties of the returns of stock 1, stock 2, and of the market (m): 1 = 0.20, 2 = 0.30, m = 0.15, 1m = 0.4, 2m = 0.7 and E[rm] = 0.10. Also, suppose that the risk-free rate rf = 0.05. Assume that the Capital Asset Pricing Model holds.

(a) What should be the expected return of stock 1 and of stock 2?

(b) Suppose that the correlation between the return of stock 1 and the return of stock 2 is 0.5. What is the expected return of a portfolio that has a 40% investment in stock 1 and a 60% investment in stock 2?

(c) Construct a new portfolio using the market portfolio and the risk-free asset that has the same expected return as the portfolio you considered in part b) but has the lowest standard deviation possible. (I want the answer for C)