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4. (20 points) Let the information on your portfolio be given as follows. You have three assets in the basket. The beta's among them are
4. (20 points) Let the information on your portfolio be given as follows. You have three assets in the basket. The "beta's" among them are given as follows; B = -0.45, B2= 0.89 Ba= 1.2, Answer the following questions; a) Why do we need these "beta's" to construct the portfolio? b) If the risk-free rate is given as 3%. what are the required returns for asset 1 and asset 2 if the market rate of return is expected to have 10%? c) Is it possible to construct a risk-free (or zero-beta) portfolio by combining asset 1 and asset 2? If yes, what is the required return for this portfolio? If the transaction cost for this portfolio requires 4.5% of commission, will you do it? d) If you'd like to form a portfolio with these three assets that mimic the overall market, what are the weights of this portfolio? (Notice that there may be more than one answer for this problem)
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