Answer the following three questions

Question One $(5$ marks$)$

You hove the following projections for two stocks

a$)$ What are the expected retums and standard deviations for these two stocks?

b$)$ Decide which stock the firm should invest in and justify your decision.

c$)$ Suppose the firm has $$20,000$ total and it wants to invest $$15,000$ in stock $x$ and

the remainder in stock $Y.$ Using the above information, what would be the

expected return: and standard deviation of the firm's portfolio?

Question Two $(2\mathrm{.}5$ marks$)$

Suppose you have the following observation:

a$)$ If the risk$-$free rate is $7\%,$ are these securities correctly priced?

b$)$ What would the risk$-$free rate have to be if these securities are correctly priced?

Question Three $(2\mathrm{.}5$ marks$)$

Suppose the risk$-$free rate is $8\%$ and the market expected return is $16\%.$ If a particular

stock $($L$)$ has a beta of $0\mathrm{.}7,$ what is its expected return? It another stock $($M$)$ has an

expected return of $24\%$ what must its beta be$?$