b) Suppose you have invested all your capital ($200,000) in a portfolio of one stock only, Facebook. Facebook has an expected return of 18% and a volatility of 35%. You know that the market portfolio has an expected return of 11% and a volatility of 13%. Assume that the risk-free interest rate is 3%. Under the CAPM assumptions:

i. What alternative investment has the lowest possible volatility while having the same expected return as Facebook? What is the volatility of this new portfolio? (4 marks)

ii. What investment has the highest possible expected return given that you want to maintain the same volatility as Facebook? What is the expected return of this new portfolio? (4 marks)

c) Briefly discuss the ways you know to diversify a portfolio. (6 marks)

d) Briefly describe the CAPM assumptions. (3 marks) e) Describe what each of the following pairs of asset pricing models has in common, and how they differ: i. APT and CAPM ii. CAPM and F-F-C (Fama-French-Carhart) model (5 marks)