The solving process of Q1 &Q2

Question 1 (50 marks) a. State and explain whether the following statements are true or false. (i) The beta of a portfolio must be larger than the beta of any of its constituent stocks. (3 marks) (ii) If a security lies above the security market line (SML), then it must be overpriced 4 marks) (iii) If CAPM is valid, then a stock having more volatility in return must have larger expected return than a stock with less volatility in return in order to compensate for (6 marks) the higher risk borne b. You have the following information of expected returns and betas for six assets. Assume CAPM is valid and asset X and asset Y are priced correctly Asset Expected Return Beta 10.51 15.06 17.28 21.34 24.59 26.54 0.93 1.58 1.95 2.26 2.75 3.22 (i) Which asset(s) is/are overpriced? Which asset(s) is/are underpriced? Please explain (22 marks) your answer in detail (ii) After studying the information above, Anna tells you that she can construct a portfolio containing assets A and C that would outperform asset B. Is Anna correct? Show your calculation to prove whether Anna is correct or not. (15 marks)