Look again at the set of the three efficient portfolios that we calculated in Section 8.1 .

a. If the interest rate is 10%, which of the four efficient portfolios should you hold?

b. What is the beta of each holding relative to that portfolio? ( Hint: Note that if a portfolio is efficient, the expected risk premium on each holding must be proportional to the beta of the stock relative to that portfolio. )

c. How would your answers to

(a) and

(b) change if the interest rate were 5%?

AppendixLO1