5 The market portfolio has yielded 12 per cent on average over past years. It is expected to offer a risk premium in future years of 7%. The standard deviation of its return is 8 per cent. The risk-free rate is 5 per cent.

(i) What is the expected return from the market portfolio?

(ii) Draw a diagram to show the location of the Capital Market Line.

(iii) What is the expected return on a portfolio comprising 50% invested in the market portfolio and 50%

invested in the risk-free asset?

(iv) What is the risk of the portfolio in (iii)?

(v) What is the market trade-off between portfolio risk and return suggested by these figures?