a) John Smith is a portfolio manager at Austin & Associates. For all of his clients, Smith manages portfolio that lies on the Markowitz efficient frontier. Smith ask Mary Damas, managing director at Austin to review the portfolio of his two clients, the Eagle Manufacturing Company and the rainbow Life Insurance Co. the expected return of the two portfolios are substantially different. Mary determines that rainbow portfolio is virtually identical to the market portfolio and conclude that the Rainbow portfolio must be superior to eagle portfolio. Do you agree or disagree with Marys conclusion that the rainbow portfolio is superior to Eagle portfolio? Justify your response with reference to the capital market line.

b) smith remarks that Rainbow portfolio has a higher expected return because it has a greater nonsystematic risk than eagle portfolio Define nonsystematic risk and explain why you agree or disagree with Smiths remarks.