Pauline, a portfolio manager, is making recommendations to her clients, Luke. Pauline is considering whether to add Stock A or B into Luke's well-diversified portfolio. She has made the following estimates: Table 1: Expected Returns and Standard Deviations of different assets Expected Returns Standard Deviations Stock A 16% 25% Stock B 20% 28% Market index 12% 10% Luke's portfolio 11% 11% Risk-free asset 3% Table 2: Correlation coefficient Market index Stock A 0.70 Stock B 0.40 Luke's portfolio 0.92 Market index 1 Stock A 1 Luke's portfolio 0.65 0.42 1 Stock B 0.56 1 (a) Identify and explain briefly which stock (Stock A and/or Stock B) is/are overpriced under CAPM. Show your calculations. (6 marks) (b) Identify and explain whether Stock A or Stock B should be added in Luke's portfolio for minimizing market risk exposure. (3 marks) Pauline, a portfolio manager, is making recommendations to her clients, Luke. Pauline is considering whether to add Stock A or B into Luke's well-diversified portfolio. She has made the following estimates: Table 1: Expected Returns and Standard Deviations of different assets Expected Returns Standard Deviations Stock A 16% 25% Stock B 20% 28% Market index 12% 10% Luke's portfolio 11% 11% Risk-free asset 3% Table 2: Correlation coefficient Market index Stock A 0.70 Stock B 0.40 Luke's portfolio 0.92 Market index 1 Stock A 1 Luke's portfolio 0.65 0.42 1 Stock B 0.56 1 (a) Identify and explain briefly which stock (Stock A and/or Stock B) is/are overpriced under CAPM. Show your calculations. (6 marks) (b) Identify and explain whether Stock A or Stock B should be added in Luke's portfolio for minimizing market risk exposure