Capital Asset Pricing Model Problem The probability distribution of returns on stocks X and Y follows. 

Probability 0.10.4 0.40.1

RX-20% 0% 20% 40%

RY-4%2% 6%10%

Calculate the expected return and the standard deviation of return of a portfolio that invests$2000 in X and $3000 in Y.

Problem6.2.The historical annual returns of stocks X and Y are:

Year 2013 2014 2015 2016 2017 2018 2019 2020

RX 30% 19% -23% 21% -20% 9% 32% -4%

RY 21% 15% -15% 13% -14% 9% 21% 6%

Calculate the average return and the standard deviation of return of a portfolio that invests$2000 in X and $3000 in Y.

Problem6.3.The expected returns of stocks A and B are 12% and 16%, respectively. Thevolatilities of stocks A and B are 20% and 30%, respectively. The correlation between thetwo stocks is 0.5. use formula for the variance of a portfolio with weightwon A andweight 1won B. Maria wants to form a portfolio using one or both of stocks A andB. What is the minimum portfolio variance that Maria can achieve? You c38572an eithercalculate variance for multiple portfolios to determine the one with the lowest variance oruse calculus. What portfolio weights will result in the minimum portfolio variance?

Problem 6.4.Aasir can invest his money in risk-free asset and/or in a stockS. The risk-free asset provides a guaranteed return of 5%. The stockSprovides expected return of 15%with volatility of 40%. If Aasir wants to limit his standard deviation to no more than 24%,what is the highest expected return he can earn? If Aasir wants an expected return of atleast 20%, what is the minimum possible volatility of his portfolio? Assume Aasir can shortany asset and can invest more than 100% in any asset.Problem 6.5.The market portfolio has expected return of 14% and volatility of 30%. Therisk-free rate is 2%. Stock A has volatility of 40% and its return has correlation of 0.7 withthe return on the market portfolio. What is the expected return of stock A based on CapitalAsset Pricing Model?Problem 6.6.In each of the following cases, given a property about a securityS, specifywhether it means that the security lies above or below or on CML (Capital Market Line)when its expected return is plotted against its standard deviation or the security lies aboveor below or on SML (Security Market Line) when its expected return is plotted against itsbeta. That is, in each case, answer one of the following:

Above CML

Below CML

On CML

Above SML

Below SML

On SML

(a)Sis underpriced(b)Shas idiosyncratic risk(c) Expected return ofSis less than required return(d)Shas the highest Sharpe ratio possible(e) CAPM equation holds forS(f)Sis well-diversified