Consider two stocks, A and B, with betas of 0.5 and 1.5, respectively. You believe that the annualized expected return of the market is E[rM] = 10%, the annual standard

deviation of the market is M = 0.20, and the risk-free rate is 5%. Finally, you

believe that returns of A, B, and the market over the next year are represented by the regression:

(ri rf) = i + i(rM rf) + ei, for i = A, B

in which rA-rf is 0.04, rB-rf is 0.06, the R2 is 0.95 for both A and B, and where eA and eB are uncorrelated. Find the abnormal returns of these stocks (in excess of the

returns predicted by the CAPM). Find the variance of portfolio P, composed of A and B with weights wA=70% and wB=30%.