Part A

Woolworths Ltd has a beta of 0.90. If the market risk premium is 6% and the risk-free rate is 3%, what is the expected return for CSL Ltd according to CAPM?

Part B

Can a portfolio standard deviation be less than the standard deviation of every asset in the portfolio? If yes, please give an example.

Part C

There are two stocks in your portfolio. Stock Weight E(r) Standard Variance A 50% 10% 6% B 50% 20% 12%

a) Assume stock A and B have a correlation of 0.5, calculate the risk and return for your portfolio.

b) Repeat (a), assume the correlation is -0.5. Why is the risk now lower in (b) than in (a)?

c) Will you invest in Stock A alone if the correlation between A and B is -0.5?