1.A) Explain concepts of firm-specific risk, systematic risk, covariance, beta and how they are relevant for portfolio construction. Discuss what CAPM model implies for investors.

B)You are considering two stocks - Stock A with expected return of 8% and CAPM beta of 1.20 and Stock B with expected return of 11% and beta of 0.80. If the risk-free rate is 3 percent and the market risk premium is 6%, discuss whether these stocks are properly valued or not based on Security Market Line. Are they under- or over-valued?