10. (Little world CAPM) Suppose there are only two risky assets with expected rates of return r1=0.1 , r2=0.2 and covariances 12=0.04 , 22=0.09 , 1,2=0.03 . The current risk-free rate is 0.05.

(a) Find the one fund for this small market.

(b) Now suppose that there is a new project with an expected payoff Q1=10 and covariances Q2=25 , Q,1=0.8 , Q,1=0.15 . Using the one fund as the market portfolio, what is the price of this project according to CAPM?

10. (Little world CAPM) Suppose there are only two risky assets with expected rates of return 71 = 0.1,72 = 0.2 and covariances 07 =0.04, 02 = 0.09,01,2 = 0.03. The current risk-free rate is 0.05. (a) Find the one fund for this small market. (b) Now suppose that there is a new project with an expected payoff 21 = 10 and covariances o = 25,00,1 = 0.8,00,2 = 0.15. Using the one fund as the market portfolio, what is the price of this project according to CAPM? 10. (Little world CAPM) Suppose there are only two risky assets with expected rates of return 71 = 0.1,72 = 0.2 and covariances 07 =0.04, 02 = 0.09,01,2 = 0.03. The current risk-free rate is 0.05. (a) Find the one fund for this small market. (b) Now suppose that there is a new project with an expected payoff 21 = 10 and covariances o = 25,00,1 = 0.8,00,2 = 0.15. Using the one fund as the market portfolio, what is the price of this project according to CAPM