Question 3 (13 marks) (a) A portfolio's beta is a better risk measurement for a well-diversified portfolio compare to the portfolio's standard deviation. Justify. (6 marks) (b) Suppose you have interested on two stocks, which are X and Y. Based on your analysis on these two stocks, their returns are primarily affected by two common factors, namely inflation and growth in GNP. The information for each stock is presented as follows: Bli (INF) Bzi (GNP) Expected Risk Premium (%) Weight portfolio (%) 40 60 Stock X Stock Y 1.80 0.90 1.20 0.80 12 7.5 (i) Derive the general model for each stock. (2 marks) (ii) If you intend to establish a portfolio that consist stock X and stock Y. with their respective portfolio weight of 40 percent and 60 percent. Assume that the inflation rate was expected to be 3 percent, but in fact was 5 percent; meanwhile the growth in GNP was expected to be 8 percent, but in fact was 5 percent. What would be the expected return on your portfolio if the risk-free rate is 3 percent? (5 marks) Question 3 (13 marks) (a) A portfolio's beta is a better risk measurement for a well-diversified portfolio compare to the portfolio's standard deviation. Justify. (6 marks) (b) Suppose you have interested on two stocks, which are X and Y. Based on your analysis on these two stocks, their returns are primarily affected by two common factors, namely inflation and growth in GNP. The information for each stock is presented as follows: Bli (INF) Bzi (GNP) Expected Risk Premium (%) Weight portfolio (%) 40 60 Stock X Stock Y 1.80 0.90 1.20 0.80 12 7.5 (i) Derive the general model for each stock. (2 marks) (ii) If you intend to establish a portfolio that consist stock X and stock Y. with their respective portfolio weight of 40 percent and 60 percent. Assume that the inflation rate was expected to be 3 percent, but in fact was 5 percent; meanwhile the growth in GNP was expected to be 8 percent, but in fact was 5 percent. What would be the expected return on your portfolio if the risk-free rate is 3 percent