a. Set up the Security Market Line (SML) for any portfolio and explain its location and slope. Distinguish the SML from the capital market line.

b. Use your results from subtask a) to classify the following two concepts: Quantity of market risk Price of market risk

c. The time series gives rf = 0.02 for the risk-free interest rate and r m = 0.05 for the expected return on the market portfolio. The following data is also available to you:

For all five stocks, determine the expected return according to CAPM.

d. A portfolio manager compiles an (inefficient) portfolio from the five stocks from subtask c). All stocks are equally weighted in the portfolio, i.e. w1 = w2 = = w5. Determine the portfolio beta.

e. Is the following statement true or false? Justify your answer in a maximum of two sentences.

An inefficient portfolio can have a low beta and a high sigma (high volatility) at the same time.

f. Briefly explain how a commercial bank turns an uncertain loan portfolio into a safe deposit portfolio.

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