Question 4 - (20 Marks) Assume that the CAPM holds and that the expected return on the market portfolio is E[RM] = 0.07 and the standard deviation of market returns is OM -0.20. The correlation between the return on the market portfolio and the return on stock Ais -0.05. The expected (CAPM) return on stock A is E[R] = 0.04 and the standard deviation of stock A's returns is 04 = 0.25. Part A (5 Marks) What is the beta of stock A? Part B (4 Marks) What is the risk-free rate? Part C (6 Marks) There is also another stock, B. The observed (actual) return on stock B is E[R] = 0.13, its standard deviation is on = 0.55, its beta is Be = 0.14, and its returns are perfectly negatively correlated with returns on stock Ali.e., p =-1). Show that there is an arbitrage opportunity. Describe a strategy that would get you a free lunch. In this strategy, you can trade stock A, stock B, and the risk-free asset at the risk-free rate you computed in part (b). (Hint: What is the return on the minimum-variance portfolio of stocks A and B?) . Part D (5 Marks) . Keeping other things constant, what should the expected return on stock B in part (c) be so that there is no arbitrage opportunity