You own a portfolio that has invested in Stock A and Stock B. Your investment in each stock and their betas are given below, as well as other indicators.

a. What is the expected return of each stock?

b. What is the expected return of your investment portfolio?

c. In addition to previous investments you decided to invest in a risk-free security. What is the beta of your new portfolio?

d. Suppose you observe stock C's beta and observed historical average return as given below. What is stock C's theoretical return (based on CAPM)? Should you buy or sell stock C? Explain. (Even if you don't own stock, you can sell it - it is called short sale, when you borrow the stock from your broker, sell the borrowed and sometime in the future buy it and return back to the broker)

Investment Beta Stock A $1,600 0.85 Stock B $800 1.5 Risk-free return 3% Market Data Type Market return 8.00% What is the expected return of each stock and what is the expected return of market portfolio? Stock A Stock B Market Score Expected return 0 What is the expected return of your investment portfolio? Expected return 0 naddi to previous investments you decided invest in a risk-free security. What is the beta 0 Stock A Stock B $1,600 $800 0.85 1.5 Risk-free $600 Investment Beta New portfolio beta uppose you observe stock C's beta and observed historical average return as given below. What retical return (based on CAPM)? Should you buy or sell stock C? Explain. Stock C Beta Observed average return 6.00% 1 0 Theoretical return Your recommendation (Buy or sell?) Explain