4. Given that the risk-free rate is 10%, the expected return on the market portfolio is 20%, and the standard deviation of returns to the market portfolio is 20%, answer the following questions:

a. What is the slope of the capital market line?\

(Expected Return Risk Free Rate) / Standard Deviation

(20% - 10%) / 20%

= .5

b. You have $100,000 to invest. How should you allocate your wealth among risk free assets and the market portfolio in order to have a 25% expected return?

A * 0. 10 + (100000 - A) * 0. 20 = 0.25 * 100000

0.10 A + 20000 - 0.20 A = 25000

- 0.10 A = 5000

A = - 50,000

Borrow 50,000 at 10% and invest it in the market portfolio at 25% return.

c. What is the standard deviation of your portfolio in b)?

The standard deviation of returns to the market portfolio is 20% therefore the Standard deviation of my portfolio is also 20%

d. What is the correlation between the portfolio in b) and the market portfolio?

e. Suppose that the market pays either 40% or 0% each with probability one half. You alter your portfolio to a more risky level by borrowing $50,000 and investing it and your own $100,000 in M. Give the probability distribution of your wealth (in dollars) next period.