2)

Your current investment portfolio consists of the following:

Security Investment Expected Return Beta

Stock 1 $ 10,000 8.0% 1.2x

Stock 2 6,000 4.0% 0.8x

Risk-free Deposit 4,000 1.0% 0.4x

Required

(a) (2 marks) What is the expected portfolio return?

(b) (3 marks) If the average market return is 5%, what is the required return of

this portfolio?

(c) (1 mark) Based on your results in parts (a) and (b), would you be willing to keep this portfolio? Explain (Marks will be awarded on the basis of your explanation.)

(d) (3 marks) Define the concept of Beta as it relates to security pricing.

(e) (1 mark) Is this portfolio in "equilibrium"?Explain (Marks will be awarded on the basis of your explanation.)