Problem 4 (10 marks) Part A (2 marks) CSL Ltd has a beta of 0.80. If the expected market return is 10% and the risk-free rate is 4%, what is the expected return for CSL Ltd according to CAPM? Part B (2 marks) Portfolio diversication effect depends on both the volatility of the individual stocks in the portfolio and the correlations among those stocks. Is this statement correct? Explain your answer. Part C (4 marks) You are evaluating an investment in a portfolio comprising two rms' ordinary shares. You have collected the following information about the ordinary shares in BHP and Rio Tinto (both are large mining companies): Ex - -cted Return Standard Deviation 0.15 0 2 0. 1 8 Correlation coefficient a. If you invest equal amount of money in these two rms, what is the expected return and the standard deviation of the portfolio? b. What will be the standard deviation of the portfolio if the correlation coefcient becomes 0.3? Compared to (a), how should you change your investment strategy(hint: how can you lower correlation?)? Part D (2 marks) BP Oil Ltd has a beta of 1.2 and an expected return of l 1%. A risk-free asset currently earns 4%. a. What is the expected return on a portfolio that is equally invested in the two assets? b. If a portfolio of the two assets has a beta of 0.8, what are the portfolio weights