Assume there are 2 assets in the market with the following characteristics: Security i Stock A Stock B Bi 2.5 1.5 pi Var[ei] 12% 0.0169 9% 0.0144 Ei - 1% 2% Assume that the following market model is appropriate to estimate returns in the market: Ri= Mi + Bi(RM-UM) + Ei where Ri and RM are the return on the ith asset and on the market respectively. Suppose that the variance of the market return is 0.01. The actual market return is 7%. (c) (3pt) Suppose the above portfolio is well-diversified, what is its expected return? Argue the relationship between this return and the risk-free rate using no-arbitrage arguments. (d) (5pt) Use the APT formula to calculate the risk-free rate ry and the mean market return ym. (e) (2pt) Calculate the actual returns of the two stocks. (Number format: 2 decimals, i.e., X.XX%) Assume there are 2 assets in the market with the following characteristics: Security i Stock A Stock B Bi 2.5 1.5 pi Var[ei] 12% 0.0169 9% 0.0144 Ei - 1% 2% Assume that the following market model is appropriate to estimate returns in the market: Ri= Mi + Bi(RM-UM) + Ei where Ri and RM are the return on the ith asset and on the market respectively. Suppose that the variance of the market return is 0.01. The actual market return is 7%. (c) (3pt) Suppose the above portfolio is well-diversified, what is its expected return? Argue the relationship between this return and the risk-free rate using no-arbitrage arguments. (d) (5pt) Use the APT formula to calculate the risk-free rate ry and the mean market return ym. (e) (2pt) Calculate the actual returns of the two stocks. (Number format: 2 decimals, i.e., X.XX%)