(a) In CAPM framework, there are risks that are diversifiable. What are the non-diversifiable risks? (2 marks) (b) See table 1 below. With respect to the CAPM, which of the following asset would have the greatest impact on the expected return if there is a rise in the expected market return? (2 marks) Table 1 Asset Standard Deviation Beta Asset 1 22% 0.5 Asset 2 15% 1.2 Asset 3 20% 0.9 (c) Suppose the following information about a stock is known. It trades on the Hong Kong Exchange (HKEx). The current HK risk-free rate is 2.5% and the average historical annual return for HK stocks is 10%. The beta of the stock is 1.25. What is the expected return of the stock using the CAPM formula? (2 marks) (d) Consider a portfolio comprises two stocks, A and B (refer to table 2 below), with equal amount of money invested in each. Table 2 State Probability A B Boom 30% 15% 20% Bust 70% 5% 1% i. Compute the portfolio return in each state. ii. Compute the expected return for the portfolio. iii. Compute the standard deviation for the portfolio. (2 marks) (2 marks) (4 marks)