Question: The table presents the annual expected returns and standard deviations for three portfolios and for the market index: Asset E(r) Standard deviation Alp 7.4% 20%

The table presents the annual expected returns and standard deviations for three portfolios and for the market index:

Asset E(r) Standard deviation Alp 7.4% 20% Shirley 8% 14% Woolston 17% 34% Market 8% 12% The risk-free rate of interest is 2%. This stock market is in equilibrium according to the capital asset pricing model (CAPM).

(a) Calculate and interpret the beta value of each of these three portfolios. (5 marks)

(b) Do these three portfolios lie on the Capital Market Line and what do you conclude from this? (7 marks)

(c) Two new assets, Neal and Roland, are introduced to this market at prices which imply expected returns of 11% and 6%, respectively. The expected beta values are 1.7 and 0.5, respectively. Do Neal and Roland lie on the Security Market Line and what do you conclude from this?

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