1. An investor is evaluating six portfolio with the following characteristics.

Portfolio      portfolio expected return (1%)           portfolio standard deviation                                                                                          percent (%)

1                19                                              8

2                25                                              12

3                16                                              6

4                32                                              16

5                32.5                                          10

6                8                                                2

The expected return on the market portfolio is 12% with an accompanying standard deviation of 4%. The risk fee rate of interest is 5%.

Required

Using the capital market line, advice the investor on which of the above portfolios are efficient super-efficient and inefficient.   

1. In case of an efficient portfolio in (i) above state what the standard deviation should be for efficiencies to be achieved with the given expected return.                                                      (3mks)
2. Explain the practical uses of capital asset pricing model.  (6mks)