James is aspiring to become an MP (Member of Parliament) in Ghana and he has realized a basic knowledge in Development Finance would help him to be effective in the House even though this is not a condition precedent to him receiving his salary and something called ex-gratia at the end. He however, developed an extra interest in Capital Asset Pricing (CAPM) from the online lectures even though for campaign reasons he couldnt attend all the lectures. His friend, who is already an MP had a certain amount of money to invest in a microfinance institution but James impressed on his friend to wait until he was done with the Development Finance programme. He sat his friend down and advised him to rather invest 1/3 of his money in Political Party A with an expected return of 20% and a standard deviation of 16% and the rest in Political Party B with an expected return of 18% and a standard deviation of 12%. James told his friend correlation coefficient between political parties is fundamental to risk reduction and that the figure for these political parties is 0.4. James assured his friend this is a better investment than investing in a microfinance institution. His friend however told James he would only take his advice after he has been able to pass the MDEF 625: Corporate Finance, Governance and Investment (NB: PLS SHOW MANUAL CALCULATIONS, NO EXCEL OUTPUT)

e) How does Covid-19 make risk riskier?

f) The Treasury bill rate is 14 percent, and the expected return on the market portfolio is 22 percent. Using the capital asset pricing model answer the following:

g) What is the risk premium on the market? (2 marks)

h) What is the required return on an investment with a beta of 1.5?