8) Given stock X has a beta of 2 and a residual standard deviation of 22%. The market index portfolio has a standard deviation of 12%. Based on CAPM, X has an expected return of 10%,

a. Calculate the total variance of stock X.

b. Your classmate told you that you can increase stock return by holding higher residual risk. You believe you can achieve a higher rate of return by selling X and use the proceeds to buy stock Z which has the same beta but higher residual standard deviation. Can you increase the return by holding Z if CAPM is true? (No explanation required).