Question 2

a. You currently have 50% of your wealth in a risk free asset, and 50% in the four assets

Asset	Expected return on Asset	b (beta)	Percent invested in asset
= 1	7.6%	.2	10%
= 2	12.4%	.8	10%
= 3	15.6%	1.2	10%
= 4	18.8%	1.6	20%

If you want an expected rate of return of 12%, you can obtain it by selling some of your holdings of the risk-free asset and using the proceeds to buy the market portfolio.

1. If this is the way you decide to revise your portfolio, what will the set of weights in your revised portfolio be?
2. If you hold only the risk-free asset and the market portfolio, what set of weights would give you an expected 12% return?
3. If you decide to borrow 50 percent what would be your total return if you invest only in risk free and market portfolio.

(30 marks)