1.3 Expert a) The following information describes the expected return and risk relationship for the stocks of two of WAH's competitors. Expected Standard Beta Return Deviation Stock X 12% 12% Stock Y 9% 15% 0.7 Market Index 10% 12% 1.0 Risk Free Rate 5% Using only the data shown above: a) Draw and label a graph showing the security market line and position stocks X and Y relative to it. Acil b) Compute the alphas both for stock X and for stock Y. Show your work. (Hint: Alpha is the difference between the stock's expected retum and the equilibrium expected return given by the SML.) c) Assume that the risk-free rate increases to 7% with the other data remaining unchanged. Select the stock providing the higher expected risk-adjusted return and justify your selection. Show your calculations. b) The policy committee of Suntex finance recently used reports from various security analyst to develop inputs for the single-index model. Output derived from the single-index model consisted of the following efficient portfolios: Portfolio Expected Returg E(R) Standard Deviation 3% 10% 6% 3 13% 8% 4 17% 13% 5 20% 18% a) If the prevailing risk-free rate is 6%, which portfolio is the best? b) Assume that the policy committee would like to eam an expected 10% with a c of 4%. Is it possible? c) Is o of 12% were acceptable, what would the expected portfolio return be and how would the cxpected portfolio return be and how would Suntex tinance achieve it. 1 2 8%