QUESTION 1 (25 MARKS) 1. A portfolio consists of three assets: Share X with a beta of 1.2, Share Y with a beta of 0.9, and Share Z with a beta of 1.8. The respective weights of these assets in the portfolio are 40%, 30%, and 30%. The risk-free rate is 3%, and the market risk premium is 7%. Calculate the expected return of the portfolio according to the CAPM. Required: i. Calculate the expected return for each share ii. Plot a graph which shown the expected return for each share (9 marks) (8 marks) iii. In what situations would an investor prefer a security with a higher beta, and when would they prefer a security with a lower beta? (8 marks)

A portfolio consists of three assets: Share X with a beta of 1.2, Share Y with a beta of 0.9 , and Share Z with a beta of 1.8 . The respective weights of these assets in the portfolio are 40%,30%, and 30%. The risk-free rate is 3%, and the market risk premium is 7%. Calculate the expected return of the portfolio according to the CAPM. Required: i. Calculate the expected return for each share (9 marks) ii. Plot a graph which shown the expected return for each share (8 marks) iii. In what situations would an investor prefer a security with a higher beta, and when would they prefer a security with a lower beta? (8 marks)