Suppose Merck stock oers an expected rate of return of 12% and a standard deviation of 25%. The risk-free rate is 5%.

(a) Graph the Capital Allocation Lines (CAL) for Merck stock.

(b) What is the Sharpe (reward-to-volatility) ratio of Merck stock.

(c) If you have a portfolio of $15,000 with $5,000 invested in a risk free security and $10,000 in Merck stock, what is the expected rate of return of your portfolio? What is your portfolios standard deviation? What is the reward-to-volatility ratio (Sharpe ratio) of your portfolio?

(d) If your friend is more risk averse than you are and that she also has a portfolio of $15,000 invested in a risk free asset and Merck stock. Do you think she has more or less than $10,000 in Merck stock? Why?