Consider a single-index model economy. The index portfolio M has E(RM) = 6%, M = 18%. An individual asset i has an estimate of i = 1.1 and ^2(ei) = 0.0225 using the single index model Ri = i + iRM + ei. The forecast of asset is return is E(ri) = 12%. rf = 4%.

(a) According to asset is return forecast, calculate i.

(b) Calculate the optimal weight of combining asset i and the index portfolio M.

(c) Calculate the Sharpe ratio of the index portfolio M and the portfolio optimally combining asset i and the index portfolio M.