Assume that the tangency portfolio for stocks allocates 80 percent to the S&P 500 index and 20 percent to the Nasdaq composite index. This tangency portfolio has an expected return of 13 percent per year and a standard deviation of 8.8 percent per year. The beta for the S&P 500 index, computed with respect to this tangency portfolio, is

.54. Compute the expected return of the S&P 500 index, assuming that this 80%/20% mix really is the tangency portfolio when the risk-free rate is 5 percent.

AppendixLO1