Assume stock A has a beta of 0 and a volatility of 10%. Assume stock B has a beta of -0.1 and a volatility of 20%. The risk-free rate is 5%, and the market risk-premium is 5%. You have built a portfolio P which holds both stock A, stock B, and other stocks. Portfolio P has a volatility of 30%.

a) Is stock As expected return equal to, larger or smaller than the risk free rate? First answer the question then show your calculation.

b) You decide to change portfolio P by replacing stock A with the riskfree asset. Should portfolio Ps volatility increase, decreases, stay the same or you are not sure? Should portfolio Ps expected return increase, decrease, stay the same or you are not sure? First answer the question then explain.

c) Is stock Bs expected return equal to, larger or smaller than the risk free rate? First answer the question then show your calculation.

d) You decide to change portfolio P by replacing stock B with the riskfree asset. Should portfolio Ps volatility increase, decreases, stay the same or you are not sure? Should portfolio Ps expected return increase, decrease, stay the same or you are not sure? First answer the question then explain.