Suppose that the S&P 500, with a beta of 1.0, has an expected return of 13% and T-bills provide a risk-free return of 4%.

a. What would be the expected return and beta of portfolios constructed from these two assets with weights in the S&P 500 of

(i) 0;

(ii) .25:

(iii) .5;

(iv) .75;

(v) 1.0?

b. On the basis of your answer to (a), what is the trade-off between risk and return, that is, how does expected return vary with beta?

c. What does your answer to (b) have to do with the security market line relationship?