1) What is the expected return of A and B under CAPM?

2) What is the average risk aversion index of the market?

3) Express the portfolio managers view in mathematical form.

4) What is the Black-Litterman adjusted values of expected return of the market?

[21 marks] In Simpleland, there are only two risky assets in the market, A and B. The information and CAPM estimates of A and B are shown in the following table: A B 100 Million Market Capitalisation ($) Variance () 400 Million 0.01 0.09 Covariance between A and B 0.2 Expected Return on Market 20% Risk free rate 10% The manager believes that in the near future, B will outperform A by 5% with uncertainty measured in variance 0.0005. He has also assigned the error of estimating the above CAPM model in terms of variance to be 0.01, i.e. T = 0.01