Problem 1. Your uncle, Larson E. Whipsnade, has asked you for some nancial advice. His retirement savings are currently invested as follows: $30,000 in the riskless asset and $70,000 in GM stock. He wants to know if this is a sensible portfolio. You decide to analyze it based on the CAPM model. You look in a Beta Book and nd that GM stock has a Beta of 1.20 and the R2 of the regression is 0.30. (a) If rf is 7% and the expected excess return on the market (reM rf ) is 8%, what is the expected return on his portfolio? (b) Suggest a different portfolio for your uncle that has the same expected return as the old portfolio but is efcient (i.e., has the smallest variance possible for that level of expected return). (c) If the market return has a standard deviation of 22%, compute the variance and standard deviation of his current portfolio (using information provided by the R3 value) and compare it to the variance and standard deviation of the portfolio you are suggesting in part (b)