a) Discuss the advantages and disadvantages of the index model compared to the Markowitz procedure for obtaining an efficiently diversified portfolio. (25 Marks) b) The following are estimates for two stocks: The market index has a standard deviation of 22% and the risk-free rate is 8% (i) What are the standard deviations of stock A and stock B ? (10 Marks) (ii) Suppose that we were to construct a portfolio with proportions: stock A 30%, stock B 45% and risk free assets 25%. Compute the expected return, standard deviation, beta, and nonsystematic standard deviation of the portfolio. (40 Marks) c) Discuss why high-alpha stocks are desirable investments for active portfolio managers. With all other parameters held fixed, what would happen to a portfolio's reward-to-volatility ratio as the alpha of its component securities increases? (25 Marks)