Part 2: Risk and Return (25 marks) 1. Explain the following statement true or false. (2 marks) "According to CAPM, stock with a beta of zero will offer a zero rate of return." 2. Explain the following statement true or false. (2 marks) "Diversification eliminates idiosyncratic risk but does not eliminate systematic risk." 3. If CAPM is valid, is the following scenario possible? Please explain your answers. (2 marks) Portfolio Beta Expected Return Risk-free 0 9% Market 1 17% Stock TED 1.2 15% 4. Using the following table to answer parts (a) - (c). Recession Normal Boom Probability 0.25 0.5 0.25 Stock INV -10% 5% 25% Stock DEV 10% 20% 10% a) What are the expected rates of return for Stocks INV and DEV? (2 marks) b) What are the standard deviations of returns on Stocks INV and DEV? (4 marks) c) Assume you invest $7,500 in Stock INV and $2,500 in Stock DEV, what is the expected return on your portfolio? Given the correlation between INV and DEV is -0.082, what is the standard deviation of the portfolio? (5 marks) 5. You decide to invest in one of the 3 stocks: FIM, IFP and QTB. Based on the historical