Assume that the CAPM holds, in which case, the return on any asset i can be written as: ri=rf+i(rmrf)+i where rf is the risk-free rate, rm is the return on the market portfolio, and i is the idiosyncratic (i.e. firm-specific) return, with E(i)=0. Assume that the risk-free rate is constant, and that the firm-specific return is uncorrelated with both the market return and the firm-specific return of any other asset. There are N risky assets in the economy. Denote by M and M2 the expected excess return and the variance of the excess return of the market portfolio. i. Show that the expected return and the systematic risk of any portfolio in this economy depends only on three variables: its market beta P,M and M2(5 marks) ii. If P is an efficient frontier portfolio with market beta equal to P, explain why P has the least idiosyncratic risk among all portfolios with market beta equal to p