(c) 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? (5 marks)

ii) Draw the capital market line and show the position of Portfolios B and M. (3 marks)

iii)Draw the security market line and show the position of Portfolios B and M. (3 marks)