B18 V I X fx A B C D E . F G H K L M N 2 You are currently invested in the Farallon Fund, a broad-based fund of stocks and other 3 securities with an expected return of 8% and a volatility of 33%. Currently, the risk-free rate is 2%. Your broker suggests that you add a small amount of a new VC fund to your current portfolio. The VC fund has an expected return of 21% and a volatility of 76%. It has a correlation of 0.19 with the Farallon Fund. Should you add the VC fund to your portfolio? Explain. (Hint: Assume that the Farallon fund is the "market" portfolio). 4 5 Here are the steps you need to take: 6 a. What is the beta of the VC fund with respect to the Farralon fund? 7 b. Given the beta, what return should you expect to get on the VC fund assuming the CAPM holds? 8 c. What return do you expect to get? Is this return better than the beta-based return? 9 10 11