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Assume the CAPM holds. Consider the annual information on Table 3 and an annual risk-free rate of 2%. Stocks A and B return correlation is

image text in transcribed Assume the CAPM holds. Consider the annual information on Table 3 and an annual risk-free rate of 2%. Stocks A and B return correlation is 0.25 . a) What is the expected return and standard deviation of a portfolio that has 50% invested in stock A and 50% invested in stock B? (5 marks) b) What are the betas of stocks A and B ? ( 3 marks) c) What is the lowest possible standard deviation for an investor who requires an expected return of 8% ? What is the standard deviation of this portfolio? (7 marks) d) If borrowing is not a possibility, what alternative investment delivers an expected return of 8% ? How is its standard deviation compared to your answer in item c)

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