Question: Part 1. Problem Solving (50 points) 1. Portfolio Theory and CAPM: The stock market comprises two stocks, A and B, and a risk-free asset. The

Part 1. Problem Solving (50 points) 1. Portfolio Theory and CAPM: The stock market comprises two stocks, A and B, and a risk-free asset. The return on the risk-free asset is Ry = 3%. The table below gives the expectations, standard deviations, and covariances for the two stocks' returns. (15 points) Expectation Standard Covariance Covariance Deviation with RA with RB RA 0.16 0.25 0.0625 0.03 0.12 0.20 0.03 0.04 (a) What are the weights of stocks A and B in the tangency portfolio? (5 points) (b) Suppose that CAPM holds, calculate the CAPM beta of stock A and B. (3 points) (c) Calculate the Sharpe Ratio of stock A, B and, the market portfolio. (2 points) (d) Suppose Meredith has the following utility function U = E[Rp] - 2Var[Rp] where Ro is her portfolio return. If she has $1,000 for investment, how much money does she have in stock A, B, and the risk-free asset? (5 points)

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