Portfolio Risk and Return. Suppose that the S&P 500, with a beta of 1.0, has an expected return of 15 percent and T-bills provide a risk-free return of 5 percent.

a. How would you construct a portfolio from these two assets with an expected return of 12 percent?

b. How would you construct a portfolio from these two assets with a beta of .4?

c. Show that the risk premiums of the portfolios in

(a) and

(b) are proportional to their betas.