Suppose you have the following information:

$($a$)$ What is the volatility of a portfolio $AB$ which is comprised of $$3,000$ invested in stock

A and $$2,000$ in stock $B?$

$(6$ marks$)$

$($b$)$ Assume Stock B is correctly priced according to the CAPM, what is Stock B$\text{'}$s beta?

What is the risk$-$free rate?

$(6$ marks$)$

$($c$)$ Once a firm has taken all positive$-$NPV projects, it is left with the decision between

whether to retain any remaining cash or distribute it to shareholders. Discuss the

advantages and disadvantages for a firm to retain more cash in the real world.

$(8$ marks$)$

$($d$)$ You have overheard the following statement: "According to portfolio theory, shares

are priced on the basis of their systematic riskiness. This means, therefore, that a

piece of bad news relating only to a particular business will not affect the market

price of that business's shares." Is this statement correct? Explain.

$(5$ marks$)$