A stock X has a beta of 0.9 and an expected return of 13%. A risk free asset currently earns 7%.

(i) What is the return on the market portfolio?

(ii) What is the return on a portfolio that is equally divided between X, the risk free asset and the market portfolio? What is the beta of this portfolio?

(iii) What happens to the rate of return on the market if the risk free rate goes up by 1%? (assume that the slope of the Security Market Line stays the same)

(iv) What happens to the rate of return on the market if the market risk premium (i.e., the slope of the Security Market Line) becomes 8%. Assume that the risk free rate stays at 7%.

(v) What happens to the expected return on X (assuming that beta for X stays at 0.9)?