QUESTION $4(20$ MARKS$)$

Your portfolio is invested $25$ percent each in Stocks A and C$,$ and $50$ percent in Stock B$.$

i$.$ Calculate the expected return for this portfolio

ii$.$ Calculate standard deviation for this portfolio

b$)$ How is standard deviation used to quantify the risk of an investment or a portfolio?

$(2\mathrm{.}5$ marks$)$

c$)$ Explain how higher standard deviation is associated with higher investment risk, and vice versa.

d$)$ The common stock of Alpha Manufacturers has a beta of $1\mathrm{.}24$ and an actual expected return of $13\mathrm{.}25$ percent. The risk$-$free rate of return is $3\mathrm{.}7$ percent and the market rate of return is $11\mathrm{.}78$ percent. Calculate the current position of this stock $($overpriced or underpriced$).$

$(3$ marks$)$

e$)$ Explain the concept of the Security Market Line $($SML$)$ and its significance in modern portfolio theory.