PLEASE SHOW ALL WORK AND EXPLAIN FORMULAS USED

Question 1:

Stock A -

Alpha= 1.5%

Beta= 1.1

Firm-Specific Standard Deviation= 45%

The market index M has an expected return of 28.4% and a standard deviation of 25%. The risk-free rate is 5%. Investors can also invest in portfolio P with weights 0.2 in A and the rest in M. Compute the standard deviation of portfolio P. Express your answer as a percent with two decimals.

Question 2:

There are two assets A and B whose correlation of returns is +1. Asset A has an expected return of 11% and a standard deviation of 10%, whereas asset B has an expected return of 19% and a standard deviation of 26%. What risk-free rate is consistent with no-arbitrage in this economy?

5%

6%

7%

8%

None of the above.