Assume that CAPM is a good representation of the risk-return relationship. They are holding a portfolio of stocks. The portfolio's standard deviation is 40% and its correlation with "M" is 0.8. The risk free rate is 2.5%, the expected market return is 12%, and the standard deviation of the market return is 17.6%.

1.What is the expected return on the portfolio?

2.Is this portfolio efficient? How can you tell?

3.If this portfolio is not efficient, how much risk reduction could you achieve, at no sacrifice in expected return, by making the portfolio an efficient one?

4.Now suppose that they are comfortable with the overall risk of the current portfolio, but want to improve their return by making their portfolio efficient. What would be the return on the efficient portfolio with the same overall risk as their current portfolio?