An investment portfolio is formed by investing 195,000 in stock X and 245,000 in stock Y. The characteristics of each of the stocks are summarized in the table below:

 

Expected Annual xpected Annual Standard Deviation 42% 31% Value Return Stock X $125,000 14% Stock Y $250,000 10% pXY 0.30 a) What is the expected annual return of the portfolio? b) What is the expected annual standard deviation of the portfolio? c) Briefly discuss the diversification effect by comparing the portfolio with individual stocks in terms of expected annual return and standard deviation. d) Briefly discuss which is a better measure of risk for a portfolio: beta or standard deviation? e) Assume the portfolio has a beta of 1.2 and the expected returm on the market portfolio for the coming year will be 12% and the risk-free rate will be 4%. Based on your answer to a), would you invest in this portfolio as per the CAPM?