The Treasury bill rate is 2% and the expected return on the market portfolio is 10%. The standard deviation of the return on the market portfolio is 20%.

a. Stock A has an expected return of 17% and a volatility of 55%. Assume that the stock is correctly priced according to the CAPM.

i. What is the beta of stock A?

ii. What is the correlation between the return on stock A and the return on the market portfolio?

iii. What portfolio P, combining the market portfolio and the risk-free asset, has exactly the same beta as Stock A? (You have to find the weight on the market portfolio, and the weight on the risk-free asset, such that your portfolio beta is equal to the beta of Stock A.)

b. A project has an IRR of 13%, a beta of 1.6 and a downward-sloping NPV function. Does the project lie above, on, or below the Security Market Line (SML)?