(1) Suppose in one year period the expected return and standard deviation of the market portfolio M are 8% and 12% respectively. The expected return of stock 1 is 6%. The standard deviation of stock 2 is 18%, and its diversifiable risk is 0.01. A portfolio that invests 1/3 of its value in stock 1 and 2/3 in stock 2 has a beta value 1. Assume the CAPM holds.

(1a) Find the beta values 1 and 2 for the two stocks.

(1b) Find the risk-free interest rate r.

(1c) Find the expected return 2 for stock 2.