The risk-free rate of interest is 2%. Stock AAA has a beta of 1.4 and a standard deviation of return = .40. The expected return on the market portfolio is 9%. Assume CAPM holds. (Note: the questions below are independent not sequential.)
a. Your current wealth is $1,000. What is the expected return for a portfolio where you borrow $500 at the risk-free rate and invest $1,500 in stock AAA?
b. What is the standard deviation of return for the portfolio in (a) above?
c. If a portfolio of the two assets (the risk-free asset, and stock AAA) has an expected return of 14%, what is the portfolio’s beta?