Problem 1. (5 Points) We have a financial market with many stocks and a risk-free asset. Assume that the expected return and risk of the market portfolio are um 6% and om = 9%, and the risk-free return is R = 4%. (a) (2 Points) Consider two stocks S and S2. From historical data you estimate the beta factors of the two stocks to be B1 0.8 and B2 = 1.2. Calculate the expected return of S and S2 by using CAPM. (b) (1 Points) If your investment banker friend tells you that he has an inside information according to which Mi = 4.2% and M2 10%. If you believe in your friend's information more than you believe in CAPM, which of the stocks should you buy and which should you sell? (c) (2 Poins) Let V and P be two portfolios. Assuming that (ov, jv) = (15%, 8.5%) and (op,Mp) (18%,8%), for each of the portfolios V and P determine if it lies on the Capital Market Line. Problem 1. (5 Points) We have a financial market with many stocks and a risk-free asset. Assume that the expected return and risk of the market portfolio are um 6% and om = 9%, and the risk-free return is R = 4%. (a) (2 Points) Consider two stocks S and S2. From historical data you estimate the beta factors of the two stocks to be B1 0.8 and B2 = 1.2. Calculate the expected return of S and S2 by using CAPM. (b) (1 Points) If your investment banker friend tells you that he has an inside information according to which Mi = 4.2% and M2 10%. If you believe in your friend's information more than you believe in CAPM, which of the stocks should you buy and which should you sell? (c) (2 Poins) Let V and P be two portfolios. Assuming that (ov, jv) = (15%, 8.5%) and (op,Mp) (18%,8%), for each of the portfolios V and P determine if it lies on the Capital Market Line