You plan to invest in Stock X, Stock Y, or some combination of the two. The expected return for X is 10% and X = 5%. The expected return for Y is 12% and Y = 6%. The correlation coefficient, XY, is 0.75. a) Calculate rp and p for portfolios investing 100%, 75%, 50%, 25%, and 0% in Stock X. b) Use the values you calculated for rp and p in part (a) to graph the attainable set of portfolios. Which part of the attainable set is efficient? Also, draw in a set of hypothetical indifference curves to show how an investor might select a portfolio comprised of Stocks X and Y. Let an indifference curve be tangent to the efficient set at the point where rp = 11%. c) Now suppose we add a risk-free asset to the investment possibilities. What effects will this have on the construction of portfolios? d) Suppose rM = 12%, M = 4%, and rRF = 6%. What would be the required and expected return on a portfolio with P = 10%? Assume the portfolio is well-diversified. (Hint: Total risk = market risk + diversifiable risk, i.e. 2 2 2 2 i i i M e b ) e) Suppose the correlation of Stock X with the market, XM, is 0.8, while YM = 0.9. Use this information, along with data given previously, to determine Stock X's and Stock Y's beta coefficients. f) What is the required rate of return on Stocks X and Y based on CAPM? Do these stocks appear to be in equilibrium? If not, what would happen to bring about an equilibrium?