Let (i, i) for i = 1, 2, . . . , n be the volatilities and expected returns of n risky investments. The expected return and volatility of the market portfolio are M = 4% p.a. and M = 18% p.a., respectively. The efficient frontier (for the risky investments) is given by the equation

^2= 56^2 2.24 + 0.0324.

Note that this equation is satisfied when = 0.18 and = 0.04 (the market portfolio).

1. (a) Find the risk-free rate of interest with annual compounding.

2. (b) Find the equation for the Capital Market Line (an equation of the form = a + b). (Round the coefficients to 6 decimals.)

3. (c) Let P be the portfolio consisting of 10% of the risk-free investment and 90% of the market portfolio. Find the expected return and volatility.