Problem 6. (6 pts) 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 M=7% and M=10%, and the risk-free rate is 4%. a) (3 pts) Consider two stocks S1 and S2. Your investment banker friend tells you that he has an inside information according to which 1=5% and 2=10%. From historical data you estimate the beta factors of the two stocks to be 1=0.7 and 2=1.4. 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? (Hint: what is the expected return of S1 and S2 if we calculate using CAPM?) b) (3 pts) Let V and P be two portfolios. Assuming that (V,V)=(15%,8.5%) and (P,P)= (4\%,5\%), for each of the portfolios V and P determine if it lies on the Capital Market Line