a. Assume that CAPM holds. Based on the given information, calculate the beta for each of the two stocks. Based on the returns calculated in the previous part, and selecting the beta as the measure of risk, does “higher risk, higher return” hold? Discuss.

b. Assume that you want to create three portfolios from the two stocks you selected (but not the risk-free rate or the market index). The weights of each stock for each of the three portfolios are given below. For each portfolio, calculate the return and beta. Which portfolio has the higher return? Also, calculate the portfolio standard deviation for each pair of the weights. Keeping the beta as a measure of risk, does “higher risk, higher return” hold? Discuss.

 

Weights AAPL JPM Portfolio X 0.5 0.5 Y 0.25 0.75 Z 0.6 0.4