3. Consider the following assets:

Asset X and Asset Y.

Standard Asset Deviation: X = .16 Y=.24

Beta: X=1.2 Y=.8

The correlation between the return on Asset X and the return on Asset Y is 0.8. Suppose a portfolio is formed by investing 40% of one's wealth in Asset X and the remaining wealth in Asset Y.

a) What is the beta of the portfolio?

b) Suppose the risk-free rate is 5% and the expected return on the market portfolio is 13%. What is the expected return of the portfolio according to CAPM?