4. Assume that we have only two following risk assets(stock 1 and 2) in the market. stock 1 stock 2 ED) 20% 10% olt) 20% 20% The correlation coefficient between stock 1 and 2 is zero(0) and the risk-free asset is 5%. In the equilibrium, the market value of stock 1 and 2 are $3 million and $1 million respectably, (a) (6 pt) What is the Sharpe ratio ([Rm)-RA) of the market portfolio? (b) (7 pt) Other things being equal, describe what happens to the above Sharpe ratio(increases or decreases?) if the correlation coefficient between stock 1 and 2 is increased? Explain graph- ically. (use mean-standard deviation plane) (c) (7 pt) Other things being equal, describe what happens to the above Sharpe ratio increases or decreases?) if the risk-free asset is 6% increased by 1%)? Explain graphically. (use mean- standard deviation plane) 5. Answer the following questions regarding the CAPM. (a) (6 pt) The risk-free rate is 3.7 percent and the expected return on the market is 12.3 percent. Stock A has a beta of 1.1 and an expected return of 13.1 percent. Is this stock correctly priced? (underpriced or overpriced?) (b) (6 pt) A stock has an expected return of 11.3 percent and a beta of 1.08. The risk-free rate is 4.7 percent. What is the slope of the security market line(SML)? What is the market risk premium? (c) (6 pt) Assuming that the CAPM is valid, stocks above the security market line (SML) are considered underpriced. What does it mean by being "underpriced"? Can you explain the logic behind this expression? (d) (6 pt) What is the characteristic difference between high beta(8 > 1) firms and low beta (B