Problem Two (15 points): It is November, 2007. The following variance-covariance matrix, for the market (S&P 500) and stocks T and U, is based on monthly data from November 2002 to October 2007. Assume T and U are included in the S&P 500. The betas for T and U are T = 0.727 and U = 0.75. S&P500 T U S&P500 0.02560.0186 0.0192 0.0186 0.1225 0.0262 U 0.01920.0262 0.0900 Average monthly risk premiums from 2002 to 2007 were: 1.0% 0.6% 1.1% S&P500 : U: Assume the CAPM is correct, and that the expected future market risk premium is 0.6% per month. The risk-free interest rate is 0.3% per month. (a) (5 points) What were the alpha's for stocks T and U over the last 60 months? (b) (5 points) What are the expected future rates of return for Tand U? (c) (5 points) What are the optimal portfolio weights for the S&P 500, T and U? Explain