Consider a Onancial market with one risk-free asset and many risky assets. The risk-free asset delivers a return of 2%. There is a stock A that delivers a return of 10% with a standard deviation of 30%. The market portfolio of all traded risky assets has a standard deviation of 8%. The correlation coe cient between stock A and the market portfolio is 0:5.

1. (a)Calculate the beta of stock A with respect to the given market portfolio.
2. (b)For this subquestion assume that the CAPM assumptions hold in this Onancial market. Then, what is the expected return on the market portfolio?
3. (c)What is the alpha for stock A?
4. (d)Suppose you are a mean-variance optimizing investor. Would you increase or decrease your holding of stock A relative to the market portfolio? If so, explain verbally how you would change your portfolio.
5. (e)Suppose you also own a private business. Does this violate any of the CAPM assumptions? As it happens, stock A represents a company that is an industry whose return is negatively correlated with the return of your private business. Does your answer to part d) change? Why or why not?