Question $3$

Fiona Fey, a portfolio manager at Tellers Asset Management, is using the CAPM for making

recommendations to her clients. The risk$-$free asset pays $5\%$ per year, and her research department has

developed the information shown in the following exhibit.

a$)$ Calculate the expected return of each stock $(x$ and $Y)$ according to the CAPM.

b$)$ Calculate the alpha of each stock $(x$ and $Y)$ from the perspective of Tellers Asset Management.

c$)$ Suppose you want to hold a portfolio consisting of three risky assets: the Market Portfolio, stock X and

stock Y$.$ Furthermore, suppose you want the beta of the portfolio to be $1$ and the alpha of the portfolio to

be $+1\%$ per year. Can you find such portfolio? What must be the weights on the Market Portfolio, stock X

and stock Y$?$