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Suppose that you manage a mutual fund. You have extensively researched two stocks, Citi and Tesla....

Suppose that you manage a mutual fund. You have extensively researched two stocks, Citi and Tesla. Given your research, you anticipate that Citi will return 8% next year and that Tesla will return 7%. Tesla stock has a beta of 0.75 and Citi has a beta of 1.9. The yield on a one-year Treasury bond is 2% and you expect the market premium to be 4%. Currently you hold both Citi and Tesla as part of a broadly diversified portfolio meant to mimic the market portfolio. Please use this information to guide your answers to the next three questions.

include formulas or work that you use for the two numerical answer questions that follow.  

Using the CAPM, the required return on Citi stock is (Please enter your answer to the nearest tenth; (e.g., 52.6).

Using the CAPM, the required return on Tesla stock is (Please enter your answer to the nearest tenth; e.g., 52.6).

On which of the two stocks, Citi or Tesla, would you choose to reduce the weightin your portfolio, given your research about Citi and Tesla and your analysis in the prior two questions? Provide a clear explanation for your choice.

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