Problem 1: Find the expected return and volatility of a portfolio with 90% invested in the S&P 500 and 10% in an emerging market index. The S&P 500 has a volatility of 15% and an expected return of 12%. The emerging market index has a volatility of 30% and an expected return of 10%. The correlation between the two is 0.1.

Problem 2: Take the S&P 500 is a proxy for the market portfolio and apply the CAPM to the emerging market index in Problem 1. Find the beta and the risk premium of the emerging market index. Use a risk-free rate of 5%. What do you notice?