1. Below information describes the expected return and risk relationship for two stocks (4 marks)

	Expected return	Standard deviation	Beta
Stock X	12%	20%	1.3
Stock Y	9%	15%	0.7
Market index	10%	12%	1.0
Risk free rate	5%

1. Draw and label a graph showing the SML, and position stocks X and Y relative to it.
2. Compute the alphas for both stocks. Show your work.
3. Assume that the risk-free rate increases to 7%, with the other data remaining unchanged. Select the stock providing the higher expected risk adjusted return and justify your selection. Show your calculations.