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(i) A portfolio consists of only two securities, S, and Sp, with variances of return V, and V's and covariance of returns CAR. Show that the minimum variance occurs when the proportion held in S, is: VB - CAB XA [3] VA -2CAB + VB (ii) Consider a two-security world in which the expected return produced by each asset is equal to the standard deviation of its returns. Assume that for Assets A and B, whose returns are perfectly correlated, both quantities are equal to 6% and 10% respectively. (a) Derive the coordinates of the minimum variance point. (b) Draw a diagram to illustrate the shape of the efficient frontier. [4] [Total 7](i) (a) State the equation of the security market line and, assuming that the market portfolio offers a return in excess of the risk-free rate, use it to derive the betas of the market portfolio and the risk-free asset. (b) Draw a diagram of the security market line relationship. (c) What does the security market line indicate about the relationship between risk and return? [9] (ii) (a) Derive the capital market line relationship and comment briefly upon its applicability. [3] (b) Briefly interpret each of the terms in the relationship. [3] [Total 15]