Your uncle, Larson E. Whipsnade, has asked you for some financial advice. His retirement savings are currently invested as follows: $30,000 in the risk-free asset and $70,000 in GM stock. He wants to know if this is a sensible portfolio. You decide to analyze it based on the CAPM model.

You look in a Beta Book and find that GM stock has a Beta 1.20. The Standard deviation of GM is 48.2%

a.) If r_fis 7% and the market risk premium (r_m- r_f) is 8%, what is the expected return on his portfolio?

b.) Suggest a different portfolio for your uncle that has the same expected return as the old portfolio but is efficient (i.e., has the smallest variance possible for that level of expectedreturn). Hint: an efficient portfolio is one which combines only two assets: the Rf asset (Rf=7%) and the Market asset (Rm=?).what percentage of assets would be invested in the market asset and which percentage would be in the Rf asset?

c.) If the market return has a standard deviation of 22%, compute the standard deviation of his current portfolio and compare it to the standard deviation of the portfolio you are suggesting in part (b).