Problem 2 You are given the following information about stock X and the market portfolio, M: E(r) o Riskless Asset (S) 0.04 (4%) 0.00 Stock X ? 0.30 Market Portfolio (M) 0.10 0.20 You are not given the expected return of stock X. The correlation of the returns on stock X and the market portfolio is equal to 0.4. a) What is the beta (B) of stock X? 1 of ?? BUS431: Security Analysis and Portfolio Management 2 b) Assuming the CAPM holds, what is the expected return on stock X? c) You have $1,000 to invest in some combination of the risk-free asset, stock X, and the market portfolio. You are thinking of investing $300 in the risk free asset, $400 in stock X, and $300 in the market portfolio. What is the overall expected return, standard deviation and beta of this portfolio? d) Instead of making the investment described in part c), you decide to be a little more sophis- ticated. You are willing to accept an overall standard deviation on your investment of up to 30%, so you decide to invest your $1,000 in whatever combination of the risk-free asset, stock X, and the market portfolio gives you the highest possible expected return, given a standard deviation of 30%? How much money do you invest in each of the three securities, and what is the expected return you achieve? You can assume that stock X is part of the market portfolio