a$)$ Consider these three stock returns with the following annualised characteristics:

Expected Return Standard deviation Beta

Stock A $16\%26\%1\mathrm{.}5$

Stock B $10\%22\%1\mathrm{.}1$

Stock C $3\%11\%0\mathrm{.}3$

According to the Capital Asset Pricing Model $($CAPM$),$ which stock is a better buy, when the market$$s expected return is $8\%,$ and risk$-$free rate is $4\%?$ What is the alpha of each stock? Plot the Security Market Line $($SML$)$ and each stock$$s risk$-$return point on one graph.

b$)$ Now suppose that the same stock returns have the following correlation matrix:

Stock A Stock B Stock C Weights

Stock A $155\%$

Stock B $0\mathrm{.}4135\%$

Stock C $0\mathrm{.}20\mathrm{.}3110\%$

If we form a three$-$stock portfolio by investing $55\%,35\%$ and $10\%$ in Stock A$,$ B and C$,$ respectively, what is the expected return and variance of this portfolio?a$)$ Consider these three stock returns with the following annualised

characteristics:

According to the Capital Asset Pricing Model $($CAPM$),$ which stock is a better

buy, when the market's expected return is $8\%,$ and risk$-$free rate is $4\%?$ What

is the alpha of each stock? Plot the Security Market Line $($SML$)$ and each

stock's risk$-$return point on one graph.

b$)$ Now suppose that the same stock returns have the following correlation

matrix:

If we form a three$-$stock portfolio by investing $55\%,35\%$ and $10\%$ in Stock A$,$ B

and $C,$ respectively, what is the expected return and variance of this portfolio?