Assume that the CAPM holds. You're currently managing two
well-diversified portfolios with the following characteristics:
The risk-free rate rate Rf is 2%, the expected market risk premium E[Rm −Rf ] is 7%,
and the standard deviation of the market return σm is 20%.
(a) One of your clients would like to invest in a portfolio with weights equal to 40%,
and 60% in portfolios A and B, respectively. What is the expected return of
the portfolio? What is the amount of systematic risk in the portfolio (i.e., the
standard deviation of returns that is explained by the market factor)?
(b) Another client wants you to build a portfolio that generates an expected return
of 12%. Show how can you offer such a portfolio using portfolios A and B. What
is the CAPM beta of that portfolio?