Assume the risk-free rate is 1% (rf = 1%), the expected return on the market portfolio is 5% (E[rM] = 5%) and the standard deviation of the return on the market portfolio is 15% (M = 15%). (All numbers are annual.) Assume the CAPM holds

a.What are the portfolio weights (in the risk-free asset and the market portfolio) for efficient portfolios (portfolios on the efficient frontier/CML) with expected returns of

(i)4%

(ii)5%

(iii)7%

b.What are the portfolio weights (in the risk-free asset and the market portfolio) for efficient portfolios (portfolios on the efficient frontier/CML) with standard deviations of

(i)6%

(ii)15%

(iii)21%

c.For a moment (but just a moment) assume that the CAPM may not hold. A non-dividend paying stock has a current price of $50/share and an expected price in 1 year of

$53/share (based on your personal analysis of the company's prospects).

(i)If the stock has a beta of 1 ( = 1.0), what is its alpha ()?

(ii) What is the alpha () if the beta is 2 ( = 2.0)?