Finance -> Please show by hand working and answer all the parts listed (NO STANDARD DEVIATION PROVIDED CALCULATE):

Assume that the market consisting of only three stocks is in a CAPM equilibrium with a risk free rate of 3%.

Stock A 42 (price) 1000 (shares outstanding) 0.0657 (Covariance with M)

Stock B 40 (price) 1200 (shares outstanding) 0.0793 (Covariance with M)

Stock C 120 (price) 500 (shares outstanding) 0.0406 (Covariance with M)

(a) Derive the CAPM of stocks A, B and C.

(b) The expected return on stock B, E[rB] = 10.93. What are the expected returns on stock A, stock C, and the market portfolio?

(c) Show that the reward-to-risk (using covariance with market as risk) ratios are in parity in a CAPM equilibrium.

(d) Construct a portfolio which has 30% in the risk-free asset and the highest possible Sharpe ratio (i.e. which sits on the Capital Market Line). What would be the portfolios expected return E[rp], standard deviation p, Sharpe ratio, , and weighting in each stock?

(e) Plot the Security Market Line, and show where stocks A, B and C sit in relation to it.