Suppose that the universe of available risky securities consists of a large number of stocks, identically distributed with E(r) = 15%, σ = 60%, and a common correlation coefficient of ρ = .5.

a. What are the expected return and standard deviation of an equally weighted risky portfolio of 25 stocks?

b. What is the smallest number of stocks necessary to generate an efficient portfolio with a standard deviation equal to or smaller than 43%?

c. What is the systematic risk in this security universe?

d. If T-bills are available and yield 10%, what is the slope of the CML? (Because of the symmetry assumed for all securities in the investment universe, the market index in this economy will be an equally weighted portfolio of all stocks.)