Question: Consider an asset with return Ri. Suppose that the variance of Ri is 0.04 and that the market component of the variance of Ri is

Consider an asset with return Ri. Suppose that the variance of Ri is 0.04 and that the market component of the variance of Ri is 0.03. Let f denote the risk-free return and assume that iE(Ri)>f.

a. Find the correlation of Ri and Rm, the return on the market portfolio.

b. If the Sharpe ratio of the market portfolio is 0.12, find if.

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