Assume the CAPM holds. Consider three feasible portfolios of stocks X, Y and Z with the following return characteristics: Portfolio Expected return Standard deviation X 7.5% 5% Y 5% 10% Z 10% 15%

An investment manager approaches you and offers you an investment product with a claimed expected return of 12% and standard deviation of 20%. Should you accept this investment? Why/why not? If not, show how the manager can optimally create a portfolio with an identical return volatility to his proposed portfolio but with a superior expected return. Illustrate your answer graphically, making sure to label all relevant elements of your picture.