CAPM The expected rates of return on the French firms, Publicis and Renault, the market portfolio

(CAC 40) and the risk-free asset are given below, along with the standard deviations of these returns.

Asset Expected Return (%) Standard Deviation (%)

Publicis 17 40 Renault 10 20 CAC 40 14 17 Risk-free asset 3 0

(a) Assuming that returns are explained by the capital asset pricing model, specify the betas for Publicis and Renault, and the risk of a portfolio of Publicis and Renault with an expected return the same as the CAC 40.

(b) Specify the composition of a portfolio consisting of the CAC 40 and the risk-free asset that will produce an expected return of 10 per cent. Contrast the risk on this portfolio with the risk of Renault.