According to the CAPM, the expected return on a risky asset depends on three components. Describe each component, and explain its role in determining expected return.

b) You are a manager for a hedge fund. Your portfolio has a beta of 1.18. The portfolio consists of 25% U.S. Treasury bills, 40% in stock A, and 35% in stock B. Stock A has a risk-level equivalent to that of the overall market. What is the beta of stock B?

c) A portfolio has 25% of its funds invested in Security C and 75% of its funds invested in Security D. Security C has an expected return of 8% and a standard deviation of 6%. Security D has an expected return of 10% and a standard deviation of 10%. The securities have a coefficient of correlation of 0.6. Which of the following values is closest to portfolio return and variance?