Consider an economy with two risky assets and a risk-free bond. Suppose the CAPM model correctly describes the asset returns, the expected return of the market portfolio is 5, its variance is 3 and the risk-free rate is 1. The following information about assets 1 and 2 is also available: Asset Number of Shares Price Expected Return Return Variance 1 2 2 1/4 2 2 3 3/4 1 1 (a) Write the security market line. (10 marks). (b) Compute the beta of risky assets 1 and 2 with the market portfolio. (10 marks) (c) What is the covariance between the return of risky assets 1 and 2. (10 marks) (d) Are assets 1 and 2 mean-variance efficient? Justify your answer. (10 marks) (e) The preferences of an investor over wealth can be represented by the utility function: U (,) = 02 2 where and 2 are the mean and variance of the investor's wealth. When is it optimal to invest only on the market portfolio? Explain your answer carefully. (10 marks)