1. Suppose you believe markets are efficient and that the single-index model properly describes security returns. You estimate that On average, individual securities have idiosyncratic risk of 20% (measured as standard deviation) A broad-based, equally-weighted market index has an expected return of 8% and a standard deviation of 25% If the risk-free rate is 2%, what is your prediction of the Sharpe Ratio of a portfolio equally weighted in 10 randomly selected stocks? Clearly specify any assumptions you make.

2. According to the CAPM, expected return increases as the beta of the investors portfolio increases. Given that, evaluate the following statement as true or false: If investors have standard mean-variance preferences (U = E[r] - A(^2) ) with A>0, CAPM investors will maximise utility by borrowing as much as possible at the riskfree rate and investing the money in the market portfolio. You must explain the rationale for your answer.