Current economic conditions and consequent actions taken by the Federal Reserve have resulted in lower treasury yields. Suppose that the 3-month T-bill yield (risk-free rate) is now 0.50% (the expected market risk premium is unchanged at 6%).

4. How do the new economic conditions impact the security market line? In what direction would CalPERS have to move along the security market line (up, down, or unchanged) if it is to maintain an expected return of 7%. Explain why.

5. If CalPERS continued to invest in only the S&P 500 index and 3-month T-bills, what would its portfolio allocation (portfolio weights) and portfolio beta need to be in order for it to continue to have an expected return of 7%? What would CalPERS need to be able to do in order to create such a portfolio?