Q3. The expected return on the Market Portfolio M is E(rM)=15% the standard deviation is ?M=25% and the risk-free rate is rf=5%. The CAPM is assumed to hold.
a) Draw on a diagram the Capital Market Line derived from the above data. Make sure to clarify the intercept and the slope.
b) Compute the expected return of two well-diversified portfolios (i.e. portfolios on the CML) one with st.dev of 18% and the other with st.dev of 30%.
c) Suppose that a portfolio with a beta of 0.9 has an expected return of 15%. Is this compatible with the CAPM? Explain carefully.
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