Question: Your forecasting model projects an expected return of 17.25% for Stock A and an expected return of 33.75% for Stock B. Using the information in questions 1 and 2 and your forecasted expected returns, what is your best estimate of the alpha of your portfolio when using CAPM to determine a fair level of expected return?
1. The expected rate of return on the market portfolio is 11.50% and the risk-free rate of return is 2.00%. The standard deviation of the market portfolio is 19.75%. What is the representative investor's average degree of risk aversion?
2. Stock A has a beta of 1.50 and a standard deviation of return of 32%. Stock B has a beta of 3.50 and a standard deviation of return of 58%. Assume that you form a portfolio that is 45% invested in Stock A and 55% invested in Stock B. Using the information in question 1, according to CAPM, what is the expected rate of return on your portfolio?