Consider an economy with the CAPM holds. A risk-averse investor thinks about investing in two portfolios: the market portfolio with a standard deviation sigma_M = 16% and the small stock fund with a standard deviation sigma_s = 36%. You can borrow and lend using T-bills with a risk-free rate r_f = 5%. The market risk premium, E(r_M) - r_f is 8%. and the small stock fund has a beta equal to 1.5. (a) What is the small stock fund's expected return according to the CAPM? (b) Suppose that the investor only invest in one of the two portfolios along with T-bills. Which portfolio does she prefer? Please motivate your answer (tips: using the definition of Sharpe ratio). (c) Given that you invest in the market and T-bills, which portfolio gives you the lowest standard deviation and an expected return equal 17%? Calculate its standard deviation and beta. (d) Suppose that the idiosyncratic (or fund specific) risk of the small stock fund increases. How does that affect the expected return on the fund? Suppose that the expected return on the market portfolio increases. Will that affect the value (price) of the small stock fund? Please motivate your answers