Question 2 (answer all parts) a. Suppose you have invested in a portfolio P of stocks. At the moment, portfolio P has an expected return of 32% and a volatility of 15%. Your financial adviser suggests that you add Tesla stock (TSLA) to your current portfolio. TSLA has an expected return of 39%, a volatility of 58% and a correlation of 0.55 with your current portfolio P. Risk-free interest rate is equal to 2%. i. ii. Calculate the required return on the TSLA. (5 marks) Will adding TSLA improve your portfolio? Provide a brief explanation of your answer. (5 marks) b. Now suppose you have invested all your capital ($150,000) in TSLA stock only. You know the characteristics of TSLA in terms of expected return and volatility from part a). You know also that the market portfolio has an expected return of 15% and a volatility of 19.8%. Assume again that the risk-free interest rate is 2%. Under the CAPM assumptions: i. ii. How much you should borrow to create an investment with the lowest possible volatility while having the same expected return as TSLA? (6 marks) What would be the volatility of this new investment? (4 marks) c. Describe the CAPM assumptions. (5 marks) d. Suppose that the expected risk premium on small stocks relative to large stocks is 9%, the expected risk premium on high book-to-market stocks relative to low book-to-market stocks is 6%, and the expected risk premium on prior one year momentum portfolio is 4%. Assume also that the expected risk premium on the overall stock market relative to the risk-free rate is 13%. TSLA stock has a market beta of 2.04, a size beta of 0.7, a book-to-market beta of 0.45, and a prior one year momentum beta of 0.65. If the annual risk-free rate is 2%, what is the risk premium of TSLA stock according to the Fama-French-Carhart (F-F-C) model? (5 marks)/ne. Describe what each of the following pairs of asset pricing models has in common, and how they differ: i. APT and CAPM ii. F-F-C (Fama-French-Carhart) model and APT

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Question 2 (answer all parts) a. Suppose you have invested in a portfolio P of stocks. At the moment, portfolio P has an expected return of 32% and a volatility of 15%. Your financial adviser suggests that you add Tesla stock (TSLA) to your current portfolio. TSLA has an expected return of 39%, a volatility of 58% and