Consider stock 1 (Facebook with ticker symbol FB), stock 2 (Home Depot with ticker symbol HD), a portfolio P consisting of stocks 1 and 2. The market portfolio M is the S& P 500. Here are some notation and formulas:

the risk-free interest rate: r; the average daily return: 1, 2 and M the variance of daily return: 12, 2 and M2 , the covariance between daily returns: 1,2, 1,M, 2,M the proportion of each stock in portfolio P: c1, c2

the average daily return of portfolio P: P = c11 + c22

the variance (total risk) of portfolio P: P2 = c2112 + c22 + 2c1c21,2.

(a) Download the data (daily adjusted closing prices) of stocks 1, 2 and index M for the time period 1/1/19 to 9/30/20 into an Excel file, convert the prices to daily returns,and calculate the values of 1,2,M,12,12,M2 ,1,2,1,M,2,M. (b) Assume r = 0.015. Calculate the beta values 1, 2 for stocks 1 and 2 respectively.

Note: interest rates are expressed as annual rates. You need to convert r to a daily interest rate before using it in CAPM because other returns are expressed as daily returns. (c) Assume portfolio P has c1 = 0.4 and c2 = 0.6. Find the beta value P for portfolio P.

(d) Calculate P based on c1 and c2 given in (c) without using CAPM. (e) Calculate P predicted by CAPM. (f)Compare the results of P obtained in (d) and (e); determine whether portfolio P is overpriced or underpriced by CAPM.

(g) What proportion of the risk for portfolio P is systematic risk?

Note: systematic risk of asset j is j2M2 and its total risk is j2