Assume the following information for two stocks, A and B, and a risk-free asset.

	Expected Return	Standard Deviation	beta	Correlation
				Stock A	Stock B
Stock A	10%	14%	1.4	1	0.4
Stock B	7%	19%	0.8		1
Risk-free asset	3%	0%

(a) Suppose you have a portfolio with investment of $200 in stock A, $400 in stock B, and $400 in the risk-free asset. Compute the expected return and standard deviation of this portfolio. (5 marks)

(b) Consider a portfolio that consists of only stocks A and B (but not the risk-free asset). If the expected return of this portfolio is 8%, what is the amount invested in Stock A? (2 marks)

(c) Explain why investing in a portfolio with both Stocks A and B is more preferable than investing in either Stock A, or Stock B only. Provide TWO reasons. (4 marks)

(d) Suppose the market portfolio return is 8%. Draw the security market line (SML) on a graph with clear labels on X and Y axis. You must plot the values of the equation of the line on the axis. (4 marks)

(e) Determine where Stock A and Stock B lies on the graph of SML and whether they are correctly priced, underpriced or overpriced. (6 marks)