Consider an economy with 2 risky stocks a and b plus a risk free assets. Assume that CAPM holds. The correlation between 2 stocks is 0.30. Stock a share price is 100, shares outstanding 1000, expected return 0.250, and standard deviation is 0.

Stock a share price is 100, shares outstanding 1000, expected return 0.250, and standard deviation is 0.30. Stock b share price is 40, shares outstanding 2500, expected return 0.345, and standard deviation is 0.40.

1. Determine the market portfolio weights for stock a and b.

2. Compute expected return and standard deviation.

3. Determine capm beta of each stock.

4. What’s is the risk free rate in this economy.

5. A naïve investor wants to construct a portfolio of the risk free assets and stock b that has the same standard deviation as the market portfolio. What is the expected return between this new portfolio and the market portfolio explain?