Question 1 (10 marks) Your current portfolio consists of three assets, the common stock of IBM and GM combined with an investment in the risk-free asset. You know the following about the stocks: P IBM, M = 0.60; OBM=0.09; PGM, M = 0.80 o GM=0.0625 where Pij denotes the return correlation between asset i and asset j, o = denotes the return variance of asset i, and M denotes the market portfolio. You also know that the expected return on the market portfolio M is 0.13 and that its return variance is 0.04. The risk-free rate is 0.04. Suppose that investors can borrow and lend at the risk-free rate and that the CAPM describes expected returns on assets. You have $200,000 invested in IBM, $200,000 invested in GM, and $100,000 invested in the risk-free asset. a) Required: Calculate the expected rates of return on IBM stock and GM stock. (3 marks) b) Required: Calculate the beta of your portfolio. c) Assume that the return correlation between IBM and GM is 0.40. (1 mark) Required: Calculate the return standard deviation of your portfolio. (3 marks) d) Suppose that you can also invest in the market portfolio. You would like to find an efficient portfolio that has the same standard deviation as your portfolio you calculated in part c) but has the highest expected rate of return possible. Required: Calculate the expected rate of return on this efficient portfolio. (3 marks) Question 1 (10 marks) Your current portfolio consists of three assets, the common stock of IBM and GM combined with an investment in the risk-free asset. You know the following about the stocks: P IBM, M = 0.60; OBM=0.09; PGM, M = 0.80 o GM=0.0625 where Pij denotes the return correlation between asset i and asset j, o = denotes the return variance of asset i, and M denotes the market portfolio. You also know that the expected return on the market portfolio M is 0.13 and that its return variance is 0.04. The risk-free rate is 0.04. Suppose that investors can borrow and lend at the risk-free rate and that the CAPM describes expected returns on assets. You have $200,000 invested in IBM, $200,000 invested in GM, and $100,000 invested in the risk-free asset. a) Required: Calculate the expected rates of return on IBM stock and GM stock. (3 marks) b) Required: Calculate the beta of your portfolio. c) Assume that the return correlation between IBM and GM is 0.40. (1 mark) Required: Calculate the return standard deviation of your portfolio. (3 marks) d) Suppose that you can also invest in the market portfolio. You would like to find an efficient portfolio that has the same standard deviation as your portfolio you calculated in part c) but has the highest expected rate of return possible. Required: Calculate the expected rate of return on this efficient portfolio