(a) Alice intends to invest in the market portfolio and Treasury Bills. She desires an expected return of 20%. What fractions of her wealth should she invest in the market portfolio and Treasury Bills to achieve this expected return?

(b) What is the volatility of Alice' s portfolio?

(c) Does the CAPM hold in this setting? or More information is required?

(d) Suppose now that Stock A and Stock B have the same market capitalizations and volatilities as in Part A. Stock A and Stock B are still uncorrelated. However, the expected return on Stock A is now 12%. Supposing that the CAPM holds, what must be the expected return on Stock B?

Suppose that the market portfolio is composed of two stocks, which we call Stock A and Stock B. Stock A has a market capitalization of $600 million, an expected return of 15% (EAR), and a volatility of 40%. Stock B has a market capitalization of $400 million, an expected return of 10% (EAR), and a volatility of 25%. The correlation between Stock A and Stock B is zero. The return on Treasury bills is 5% (EAR). Suppose that the market portfolio is composed of two stocks, which we call Stock A and Stock B. Stock A has a market capitalization of $600 million, an expected return of 15% (EAR), and a volatility of 40%. Stock B has a market capitalization of $400 million, an expected return of 10% (EAR), and a volatility of 25%. The correlation between Stock A and Stock B is zero. The return on Treasury bills is 5% (EAR)