QUESTION 2 (a) The following information describes the expected return and risk relationship for the two stocks: (i) Compute the alphas for both X and Y stocks. (5 marks) (b) Assume that risk-free rate increases to 7 percent with the other data in the table above remaining unchanged. Which stock you will long (buy) and which one will you short (saie) and why? Justify your answer with calculations. (b) (5 marks) (Total 10 Marks) Davenport Corporation's last dividend was $2.70 and the directors expect to maintain the historic 5 percent annual rate of growth. You plan to purchase the stock today because you feel that the growth rate will increase and the stock price will reach $25 per share. (i) How much should you be willing to pay for the stock if you require a 17 percent return? Assume a three year holding period. (5 marks) (ii) How much should you be willing to pay for the stock if you feel that a 5 percent growth rate can be maintained indefinitely and you require a 17 percent return? (5 marks (Total 20 marks END OF QUESTION 2