Peter wants to build a portfolio using T-bills and an index fund that tracks the NSE-20-share market index. The index fund has an expected return of 16% and a standard deviation of 30%. T-bills have a return of 10%.

Required:

1. Explain why T-bills are perceived to have a risk of zero
2. Why are major stock market indices used as proxy for the market portfolio?

3. What are the homogeneous expectations of investors
4. Why is the slope of the capital market line referred to as the Sharpe ratio?

5. If Peter invests 100% of his funds in T-bills, what is his expected return?

6. Suppose Peter invested 75% in the index fund and 25% in T-bills, estimate the return and standard deviation of the portfolio formed
7. Using the available information, plot the capital market line
8. From the graph in iv) above, determine the return and risk of a portfolio consisting 50% investment in T-bills and 50% investment in the index fund