1) The expected rate of return on the market portfolio is 9% and the risk–free rate of return is 3%. The standard deviation of the market portfolio is 22%. What is the representative investor’s average degree of risk aversion?
2) Stock A has a beta of= 1.25 and standard deviation of return of= 32%. Stock B has a beta of= 1.95 and standard deviation of return of= 40%. Suppose that you form portfolio that is 60% invested in Stock A and 40% invested in Stock B. By using information in question 1, according to CAPM, determine the expected rate of return on your portfolio? What is your best estimation of correlation between stocks A and B?