You have $100000 to invest in a stock portfolio. Your choices are Stock X with an expected return of 15% and Stock Y with an expected return
of 10%.

a) If your goal is to create a portfolio of 12% how much money you should invest in Stock X
and in Stock Y?

b) If risk free rate is 5% then calculate the Equity Risk Premium (ERP) for Stock X and Stock
Y.

c) If return on market portfolio is 8 percent then calculate the Market Risk Premium for
Stock X and Stock Y.

d) Calculate the beta of Stock X and Stock Y.

e) Now that you have calculated the individual stock beta calculate the portfolio beta. What
you can interpret from the portfolio beta? Is your portfolio more risky or less risky compared to the market portfolio?
f) Draw the Security Market Line. Identify the market portfolio and your investment portfolio.