Suppose there are only two risky assets with expected rates of return $bar{r}_{1}=0.1, bar{r}_{2}=0.2$ and covariances $sigma_{1}^{2}=0.04,

Question:

Suppose there are only two risky assets with expected rates of return $\bar{r}_{1}=0.1, \bar{r}_{2}=0.2$ and covariances $\sigma_{1}^{2}=0.04, \sigma_{2}^{2}=0.09, \sigma_{1,2}=0.03$. The current risk-free rate is 0.05 .

(a) Find the one fund for this small inarket.

(b) Now suppose that there is a new project with an expected payoff $\bar{Q}_{1}=10$ and covariances $\sigma_{Q}^{2}=25, \sigma_{Q, 1}=0.8, \sigma_{Q, 2}=0.15$. Using the one fund as the market portfolio, what is the price of this project according to CAPM?

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