Assume a market portfolio consisting of two securities, i = 1,2. Further, assume that the weight of security 1 in the market portfolio is W₁ = 0.5 and that the covariance matrix is given below.

a) Compute the variance of the market portfolio, _M² when the standard deviations for i = 1,2 are 5 and 8 percent respectively .

	R1	R2
R1	0.2	0.1
R2	0.1	0.2

b) Compute the CAPM-betas of security 1 and security 2, i.e. 1 and 2. [4]

c) Assume that E[rM] = 0.05 (i.e., 5%) and rf = 0.01 (i.e., 1%). Compute the expected return of both securities and their Sharpe ratios.