Consider three securities with expected returns, standard deviations

of returns and correlations between returns

1 = 0.10, 1 = 0.28, 12 = 21 = 0.10,

2 = 0.15, 2 = 0.24, 23 = 32= 0.20,

3 = 0.20, 3 = 0.25, 31 = 13= 0.25.

a) Given risk/standard deviation t = 1.5, find the corresponding

expected return u on the efficient frontier.

b)

In addtion to the three risky securities therein, assume now

2

a risk-free security with return R = 0.10 is available. Find the expected

return M and standard deviation M for the market portfolio, and derive

a linear equation for the capital market line in the expected return-risk

plane.