Assume that the mean-variance opportunity set is constructed from only two risky assets, A and B. Their

Question:

Assume that the mean-variance opportunity set is constructed from only two risky assets, A and B. Their variance-covariance matrix is

Asset A has an expected return of 30%, and Asset B has an expected return of 20%. Answer the following questions:
(a) Suppose investor / chooses his "market portfolio" to consist of 75% in asset A and 25% in asset B, whereas investor J chooses a different "market portfolio" with 50% in asset A and 50% in asset B.
Weights chosen by I are [.75 .25].
Weights chosen by J are [.50 .50].
Given these facts, what beta will each investor calculate for asset A?
(b) Given your answer to part (a), which of the following is true and why?
1. Investor / will require a higher rate of return on asset A than will investor J.
2. They will both require the same return on asset A.
3. Investor J will require a higher rate of return on asset A than will investor I.
(c) Compute the zero-beta portfolios and the equations for the security market line for each investor.

Expected Return
The expected return is the profit or loss an investor anticipates on an investment that has known or anticipated rates of return (RoR). It is calculated by multiplying potential outcomes by the chances of them occurring and then totaling these...