Question 2 (12 marks) Note that Question 2 has two parts - Part (A) and (B). Part (A) is not related to Part (B) Part (A) (8 marks) Consider a market with two risky assets A and B. M is the market portfolio. F is the riskfies asset. This is a perfect market with no taxes or other frictions, and the prices given are equilibrium prices. All returns are annual returns. Expected Standard Correlation Matrix Deviation (B) Beta Retum A B M F 12% 25% 1.0 0.1 03 0 0.5 B B 18% 30% 0.1 1.0 0.4 0 0.8 M 20% 15% 0.3 0.4 1.0 0 1.0 F 5% 0% 0 0 0 1.0 0 (a) Calculate the beta of security A and B. Show your workings and explain which security has a higher systematic risk (3 marks) IS (b) Suppose that you are forming a portfolio (called portfolio 1) which is weighted two- thirds in Security A and one-third in Security B. Calculate the expected return and the standard deviation of return for portfolio 1. Show your calculations. (3 marks) Consider a market with two risky assets A and B. M is the market portfolio. F is the risk- free asset. This is a perfect market with no taxes or other frictions, and the prices given are equilibrium prices. All returns are annual returns Expected Standard Correlation Matrix Beta Retur Deviation A B M (B) 12% 25% 1.0 0.1 03 0 22 B 18% 30% 0! 10 04 0 ?? M 20% 1596 0.3 0.4 1.0 0 110 5% 0% 0 0 0 1.0 0 (a) Calculate the beta of security A and B. Show your workings and explain which security has a higher systematic risk. (3 marks) (b) Suppose that you are forming a portfolio (called portfolio 1) which is weighted two-thirds in Security A and one-third in Security B. Calculate the expected return and the standard devintion of return for portfolio 1. Show your calculations