a) Suppose the risk-free rate is 4.4% and the market portfolio
has an expected return of 10.9%. The
market portfolio has variance of 0.0391. Portfolio Z has a correlation coefficient with the market of 0.31
and a variance of 0.3407. According to the capital asset pricing model, what is the beta of Portfolio Z?
What is the expected return on Portfolio Z?
b) Suppose Portfolio X has beta of 1 with expected return of 11.5%. Draw the SML and comment on
whether it is correctly priced. If not, how will the future price change according to the CAPM?
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