Problem 2 (25 marks). Consider the following properties of the returns of stock 1, the returns of stock 2 and the returns of the market portfolio (m): Standard deviation of stock 1 in = 0.30 Standard deviation of stock 2 02 = 0.30 Correlation between stock 1 and the market portfolio 91,". = 0.2 Correlation between stock 2 and the market portfolio 92,,\" = 0.5 Standard deviation of the market portfolio am 2 0.2 Expected return of stock 1 E01) 2 0.03 Suppose further that the risk-free rate is 5%. a) Aooording to the Capital Asset Pricing Model, what should be the expected return on the market portfolio and the expected return of stock 2? [10 marks] b) Suppose that the oorrelation between the return of stock 1 and the return of stock 2 is 0.5. What is the expected return, the beta, and the stande deviation of the return of a portfolio that has a 50% investment in stock 1 and a 50% investment in stock 2? [10 marks]