Question: Table 1 reports the following estimates for two stocks: Table 1 Stock Expected Return Beta Firm-Specific Standard Deviation TM 13% 0.8 30% BMW 18% 1.2

Table 1 reports the following estimates for two stocks: Table 1 Stock Expected Return Beta Firm-Specific Standard Deviation TM 13% 0.8 30% BMW 18% 1.2 40% The market index has a standard deviation of 22%, and the risk-free rate is 8%. a). What are the standard deviations of stocks TM and BMW? [12 marks] Suppose that we were to construct a portfolio with proportions: Stock TM: 0.30 Stock BMW: 0.45 T-Bills: 0.25 ). Compute the expected rate of return on the portfolio and the beta of the portfolio. [13 marks] Explain your answers

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