Q2 (21 Marks) Assume the following information for two stocks, A and B, and a risk-free asset. Correlation Expected Return Standard Deviation beta Stock A Stock B Stock A 9% 16% 1.5 1 0.3 Stock B 6% 19% 0.7 Risk-free asset 2% 0% (a) Suppose you have a portfolio with investment of $100 in stock A, $500 in stock B, and $400 in the risk-free asset. Compute the expected return and standard deviation of this portfolio. (5 marks) (b) Consider a portfolio that consists of only stocks A and B (but not the risk- free asset). If the expected return of this portfolio is 5%, what is the amount invested in Stock A? (2 marks) (c) Explain why investing in a portfolio with both Stocks A and B is more preferable than investing in either Stock A, or Stock B only. Provide TWO reasons. (4 marks) (d) Suppose the market portfolio return is 7.5%. Draw the security market line (SML) on a graph with clear labels on X and Y axis. You must plot the values of the equation of the line on the axis. (4 marks) (e) Determine where Stock A and Stock B lies on the graph of SML and whether they are correctly priced, underpriced or overpriced. (6 marks) Q2 (21 Marks) Assume the following information for two stocks, A and B, and a risk-free asset. Correlation Expected Return Standard Deviation beta Stock A Stock B Stock A 9% 16% 1.5 1 0.3 Stock B 6% 19% 0.7 Risk-free asset 2% 0% (a) Suppose you have a portfolio with investment of $100 in stock A, $500 in stock B, and $400 in the risk-free asset. Compute the expected return and standard deviation of this portfolio. (5 marks) (b) Consider a portfolio that consists of only stocks A and B (but not the risk- free asset). If the expected return of this portfolio is 5%, what is the amount invested in Stock A? (2 marks) (c) Explain why investing in a portfolio with both Stocks A and B is more preferable than investing in either Stock A, or Stock B only. Provide TWO reasons. (4 marks) (d) Suppose the market portfolio return is 7.5%. Draw the security market line (SML) on a graph with clear labels on X and Y axis. You must plot the values of the equation of the line on the axis. (4 marks) (e) Determine where Stock A and Stock B lies on the graph of SML and whether they are correctly priced, underpriced or overpriced. (6 marks)