Suppose the current market risk expected excess return is 16%. Company Z has a standard deviation of 10%, a beta of 0.8, and an expected rate of return of 16.5%. The standard deviation of the market portfolio is 14%. Assume that all stocks are correctly priced by the CAPM.

1. What are the levels of the risk-free rate and the expected return on the market portfolio in this economy? (3 marks)

2. Company G has a standard deviation of 16% and a beta of 1.4. What is the expected return on company G? (2 marks)

3. Suppose you invested $275,200 in Z and G stocks. The beta of your portfolio is 1.25. How much did you invest in each stock? What is the expected return of this portfolio? Is it efficient if its standard deviation is 12%? Explain and interpret your answer (3 marks)