Problem 2 (12.5pts) You have $10,000,000 and you are considering investing in three stocks: A, B and C. The expected return and standard deviation of the market are equal to 8% and 16% respectively. The risk-free rate is equal to 1%. Dave, your friend, has arrived to some expected return figures for these stocks. A B Beta 0.8 0.5 1.35 Standard Deviation 14% 20% 30% Dave Forecasted Return 10% 8% 12% a. Is Dave correct about his conclusion on forecasted returns? Please explain why and indicate by how much Dave's forecasted returns differ from what should be the risk-adjusted expected returns available in the market for each of the stocks A, B, and C respectively? (6pts) b. If you decided to invest $5,000,000 equally across the three stocks. 1. What is the beta of your portfolio? (2.5pts) 2. What is the expected return on your portfolio? (2.5pts) c. What type of risk we care about and how it is measured? (1.5pts)