Stock A has a beta of 1.20 and Stock B has a beta of 0.8. Suppose rf = 2% and RM = 12%.
(a) According to the CAPM, what are the expected returns for each stock?
(b) What is the expected return of an equally weighted portfolio of these two stocks?
(c) What is the beta of an equally weighted portfolio of these two stocks?
(d) How can you use your answer to part (c) to answer part (b)?
