2.1. Suppose you observe the following situation:

Assume the shares are correctly priced based on CAPM, what is the expected return based on the market? (8 Marks)

2.2. Here are some historical data on the risk characteristics of Boeing and Polaroid:

BoeingPolaroid(beta)0.781.01Standard deviation (%)2126

Assume the standard deviation of the return on market was 15 percent.

a) The correlation coefficient of Boeing's return versus Polaroid's is .37. What is the standard deviation of a portfolio invested half in Boeing and half in Polaroid? (7 Marks)

b) What is the standard deviation of a portfolio invested one-third in Boeing, one-third in Polaroid, and one-third in Treasury Bills? (Assume T-Bills are risk free) (5 Marks)

c) What is the standard deviation if the portfolio is split evenly between Boeing and Polaroid and is financed at 50 percent margin, i.e., the investor puts up only 50 percent of the total amount and borrows the balance from the broker? (2 Marks)