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Two long-time friends, Dominique and Emily, have decided to hire Katie Ford, a trusted acquaintance, as their financial advisor. The two friends are very successful in their careers, but they rarely have time to perform a financial checkup". As a result, they have asked Katie to review their portfolios and compare them against other potential investment opportunities. Dominique currently invests in new ventures but dislikes using leverage. I just don't want to owe money she frequently argues. In contrast, Emily only invests in low risk equities but enhances the returns of her portfolio using leverage. Leverage is the ability to do more with less; I buy safe firms many times over, she says. Assume that each of the two portfolios is invested in the stock of exactly 10 firms. Diligently, Katie reviews the portfolios of the two friends, and based on current market information and her solid financial training, uncovers that while Dominique and Emily differ in their investment strategies, both of their portfolios have a 20% expected return. At the time of her analysis, the risk-free rate at all maturities is 2% (EAR) and the expected market risk premium is 6%. For this question (parts (a) through (c)) assume that the Capital Asset Pricing Model (CAPM) holds, and that all investors can freely borrow and lend at the risk-free interest rate of 2% (EAR). Part A (10 Points): Assuming that Katie's analysis is correct, what is the beta of each of the portfolios? The beta of Dominique's portfolio is: The beta of Emily's portfolio is: Show your work/Explain your answer: Part B (10 Points): Assume that Emily only invests in (i) firms with equity betas of exactly 0.6 (e = 0.6), and (ii) uses leverage to achieve the expected 20% expected return. What is Emily's portfolio weight in the risk-free asset? Emily's portfolio weight in the risk-free asset is: Show your work/Explain your answer: Part C (15 Points): Assuming that Katie can convince Dominique and Emily to change their investment strategies and drop their existing views about investing, what alternative investment strategy (if any) can she suggest to Dominique, Emily, or both, to improve their risk-return tradeoffs? In answering this question, assume that Dominique and Emily both continue to desire a 20% expected return. In your recommendation, please be as specific as possible. Given that they already hold diversified investments, no investment strategy can improve their current risk-reward tradeoff. Katie can improve the risk-reward tradeoff for both Dominique and Emily by suggesting the following alternative portfolio: Katie can improve the risk-reward tradeoff for Dominique only but not for Emily by suggesting the following alternative portfolio: Katie can improve the risk-reward tradeoff for Emily only but not for Dominique by suggesting the following alternative portfolio: Briefly explain your answer: Two long-time friends, Dominique and Emily, have decided to hire Katie Ford, a trusted acquaintance, as their financial advisor. The two friends are very successful in their careers, but they rarely have time to perform a financial checkup". As a result, they have asked Katie to review their portfolios and compare them against other potential investment opportunities. Dominique currently invests in new ventures but dislikes using leverage. I just don't want to owe money she frequently argues. In contrast, Emily only invests in low risk equities but enhances the returns of her portfolio using leverage. Leverage is the ability to do more with less; I buy safe firms many times over, she says. Assume that each of the two portfolios is invested in the stock of exactly 10 firms. Diligently, Katie reviews the portfolios of the two friends, and based on current market information and her solid financial training, uncovers that while Dominique and Emily differ in their investment strategies, both of their portfolios have a 20% expected return. At the time of her analysis, the risk-free rate at all maturities is 2% (EAR) and the expected market risk premium is 6%. For this question (parts (a) through (c)) assume that the Capital Asset Pricing Model (CAPM) holds, and that all investors can freely borrow and lend at the risk-free interest rate of 2% (EAR). Part A (10 Points): Assuming that Katie's analysis is correct, what is the beta of each of the portfolios? The beta of Dominique's portfolio is: The beta of Emily's portfolio is: Show your work/Explain your answer: Part B (10 Points): Assume that Emily only invests in (i) firms with equity betas of exactly 0.6 (e = 0.6), and (ii) uses leverage to achieve the expected 20% expected return. What is Emily's portfolio weight in the risk-free asset? Emily's portfolio weight in the risk-free asset is: Show your work/Explain your answer: Part C (15 Points): Assuming that Katie can convince Dominique and Emily to change their investment strategies and drop their existing views about investing, what alternative investment strategy (if any) can she suggest to Dominique, Emily, or both, to improve their risk-return tradeoffs? In answering this question, assume that Dominique and Emily both continue to desire a 20% expected return. In your recommendation, please be as specific as possible. Given that they already hold diversified investments, no investment strategy can improve their current risk-reward tradeoff. Katie can improve the risk-reward tradeoff for both Dominique and Emily by suggesting the following alternative portfolio: Katie can improve the risk-reward tradeoff for Dominique only but not for Emily by suggesting the following alternative portfolio: Katie can improve the risk-reward tradeoff for Emily only but not for Dominique by suggesting the following alternative portfolio: Briefly explain your