In a two-stock capital market, the capitalization of stock A is twice that of B. The standard deviation of the excess return on A is 30% and on B is 50%. The correlation coefficient between the excess returns is .7.

a. What is the standard deviation of the market index portfolio?

b. What is the beta of each stock?

c. What is the residual variance of each stock?

d. If the index model holds and stock A is expected to earn 11% in excess of the riskfree rate, what must be the risk premium on the market portfolio?