3. (CAPM) The Triple Happiness Mutual Fund's investment portfolio previously included only riskfree assets [say, U.S. T-bills], and a welldiversified (market) portfolio [say. 3&P500], but has no specific investments in real estate. The fund has planned to diversify its investment portfolio to include indirect real estate and considered purchasing shares of three realestate related listed companies. The following table shows the (incomplete) estimates of the risk for the shares of - the three companies during the five years ending Nov 201?: Company Expected Standard Residual Retum Deviation standard deviation _-_-I __-i -m_ a. Denote the risk-free rate by rf and expected rate of return of market portfolio, FM. (a) What are the assumptions beneath CAPM? (8 marks) (b) Suppose that CAPM holds, i. Show that rf= 3% and rM=13% (6 marks) ii. Compute the missing information above. (9 marks) (0) Suppose B is mispriced and its corresponding expected return is at 129'!) (r3 .. 12%)- Apply Treynor-Black model to construct an optimal risky portfolio. Compute- the optimal risky portfolio's beta and Sharpe ratio. (10 marks)