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Question No. 4 (6+8=14) a. Currently under consideration is an investment with a beta, , of 2.15. At this time, the risk - free rate of return, Rp is 5%, and the return on the market portfolio of assets, Rm is 17%. You believe that this investment will earn an annual rate of return of 28%. i. ii. jii. If the return on the market portfolio were to increase by 12%, what would you expect to happen to the investment's return? What if the market return were to decline by 12%. Use the CAPM model to find the required return on this investment? On the basis of your calculation in part (ii), would you recommend this investment? Why and why not? Assume that as a result of investors becoming less risk averse, the market return drops by 4%. What effect would this change have on your response in part (ii) and part (iii)? iv. b. Stocks A and B have the following historical returns: Year E(A) E(B) 2011 -19.00%-17.50% 2012 31.00 23.80 2013 11.00 33.75 2014 -0.75 -8.35 2015 31.00 29.30 i. Calculate the average rate of return for each stock during the period 2011 through 2015. ii. Assume that someone held a portfolio consisting of 60% stock A and 40% of stock B. What would the average rate of return on the portfolio have been during this period? iii. Which one is more risky? Stock A or Stock B or the portfolio? iv. Assuming you are a risk-averse investor, which one you would choose for investment