6. Answer the following questions.

1) The standard deviation of market portfolio is 20%. The average risk aversion

coefficient is 3. Risk free interest rate is 3%. Calculate the expected return of market portfolio at equilibrium.

(8 marks)

(8 marks)

3) Following 1) and 2), according to CAPM, calculate the expected returns of two stocks with betas equal to 0.6 and 1.2 respectively.

2) Following 1), There is an investor with mean-variance utility function = ( )

FINA305

2 . Calculate the optimal weight to be invested in the market portfolio for the

1

investor with = 4.

2

Page 3 of 4

(14 marks)