Assume that the CAPM holds. The expected rate of return on the market portfolio (M) is 8% and the risk free rate is 2%. The standard deviation of the market return is 15%. Portfolio B has the same beta as M and a standard deviation of 30%. Currently all of your clients funds are invested in Portfolio B.

i) Show how your client can do better by forming a 2-asset portfolio (using the market portfolio and the risk-free asset) if she wants to keep her risk exposure (standard deviation of the return on her investment) the same at 30%? What expected portfolio return can your client earn? What would be the composition of your clients portfolio?

ii) Draw the capital market line and show the position of Portfolios B and M.

iii)Draw the security market line and show the position of Portfolios B and M.