After a through analysis. you develop the following opinion:

	Market portfolio	Stock H
Expected return	12%	14%
Standard deviation	8%	15%

i) The covariance between return on the market portfolio and return on Stock H is 0.0096

ii)The risk-free rate is 6%

A) Write the CML and SML equations and calculate value of intercept and slope for each equation.

	Equation	Intercept	Slope
CML
SML

B) Calculate the beta of Stock H. [*.**]

C) Would you buy or sell stock H? Why?

D) Is the market in equilibrium ? Why? If not, how would equilibrium be achieved?

E) The total risk of Stock H can be measured by the variance of returns. i.e.,=0.0152=0.0225. What is the level of diversifiable risk of stock H? [*.****]

Hint: 0.0225 =Nondiversifiable risk + diversifiable risk

H H