Risk and Returns: Lecture Question 2 1.0 point possible (graded) Consider the following returns of two stocks in conjunction with the market M: Std. dev. of stock 1 20% Std. dev. of stock 2 02 30% Std. dev. of market 15% Expected return on the market r 10% Corr. of stock 1 with the market PIM 0.4 Corr. of stock 2 with the market P2M 0.7 Risk free rate rf 6% 1. According to the CAPM, what should the expected return of stock 1 and stock 2 be? (Note: Your answer should be a number in percentage form. Do not enter '%'.) Expected return of stock 1 = Expected return of stock 2 = % % 2. Suppose that the correlation between the returns of stock 1 and the returns of stock 2 is 0.5. What is the expected return and standard deviation of a portfolio that has 30% invested in stock 1 and 70% in stock 2. (Note: Your answer should be a number in percentage form. Do not enter '%'.) Expected return= % Standard deviation = % 3. Try to construct a new portfolio using a combination of the market portfolio and the risk free asset that has same returns as above (part 2) but with the lowest standard deviation. What is the standard deviation of this portfolio? (Note: Your answer should be a number in percentage form and negative numbers are allowed for the weights. Do not enter '%'.) Portfolio weight in the market = % Portfolio weight in the risk free asset = % Standard deviation = %