The expected return of the S&P 500, which you can assume is the tangency portfolio, is 16% and has a standard deviation of 25% per year. The expected return of Microsoft is unknown, but it has a standard deviation of 20% per year and a covariance with the S&P 500 of 0.10. If the riskfree rate is 6 percent per year,

a. Compute Microsoft’s beta.

b. What is Microsoft’s expected return given the beta computed in part a?

c. If Intel has half the expected return of Microsoft, then what is Intel’s beta?

d. What is the beta of the following portfolio?

.25 in Microsoft

.10 in Intel

.75 in the S&P 500

 .20 in GM (where GM
.80)

.10 in the risk-free asset

e. What is the expected return of the portfolio in part d?

AppendixLO1