You observe the following information in a market where the, Financial Management

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You observe the following information in a market where the

You observe the following information in a market where the CAPM holds:

β levered Expected annual return Annual standard deviation

Stock A 1.8 16.8% 45%

Stock B 1.2 13.2% 30%

The correlation between stock A and the market is 80%.

a) If the CAPM holds for both stocks, please find the expected annual market return and the risk-free rate.

b) Consider a portfolio that is split (unevenly) between the risk-free asset and the market. If the annual standard deviation of this portfolio is 16%, what is the expected annual return on this portfolio?

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