$3.$ Portfolio Theory

a$.$ Define the concept of the risk of a share as we used it in class. Explain why some investors think this is not an appropriate definition of risk.

b$.$ Write down the formula for the expected return of a portfolio of two shares. Write down the formula for the risk associated with that portfolio.

c$.$ Explain what is meant by an efficient portfolio. Draw the appropriate diagram $($return vs$.$ risk$)$ and explain its shape.

d$.$ Use the diagram to show what portfolio investors would chose if they could borrow and lend at the risk$-$free rate of interest.

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e$.$ Write down the equation of the Security Market Line. Explain this equation, in particular explain how $$beta$$ is related to the concept of risk from a$)$ above.