Question: 2. (25 points total) Suppose there are two stocks, A and B, with return rA and rB respectively. The market return is rM and

2. (25 points total) Suppose there are two stocks, A and B, with return rA and rB respectively. The market return is rM and the risk-free rate is rf. The securities characteristics line (SCL) for each stock is given by the graph below. M- 4 a. (9 points) Which asset has a higher firm-specific risk? Why? b. (8 points) For an individual that is already holding a diversified portfolio of common stock, which stock is riskier to purchase, and why? Hint: notice that the slopes of SCLs are different. c. (8 points) According to the Arbitrage Pricing Theory (APT), does an arbitrage opportunity from either stock exist, and if so, why?

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