Assume that the CAPM holds. Assume also that there are only two risky assets in the economy, assets A and B, and that the parameters for these two assets are

E(ra) = 15%

=20%

=15%

Cov(rA,rB)=0

In addition, there is a risk-free asset with a (constant) return of 5% per year. Also, the current price per share and shares outstanding for A and B are:

# shares

2,000,000

3,000,000

Asset

A

B

Share price

$40/share

$20/share

a) What is the variance of the market portfolio?

b) What is the expected return on the market portfolio?

c) What is the expected return on asset B?