2. Assume the CAPM model is valid. The risk-free asset return is 5%, and the expected return on the market portfolio is 12%. John invests in a portfolio consisting from the market portfolio and the risk-free asset, which provides and expected return of 14% and stand deviation of 18%. IBM stock has a correlation of 0.4 with the market portfolio and a standard deviation of 40%.

1. (8 points) What is the expected return of IBM stock?

2. (8 points) What is the idiosyncratic volatility of IBM?

3. (9 points) What is the expected return of an efficient portfolio that has the

   same volatility of IBM? What is the volatility of an efficient portfolio that has the same expected return as IBM?