Question 2 Jack is the manager of a portfolio whose composition is shown below. The market risk premium is 7% and the risk-free rate is 3%.

Security Investment Beta

A $5 m 1.2

B $3 m 1.0

Treasury Bills $2 m Not given

(a) Calculate the beta and expected return of the portfolio. (7 marks)

(b) Appraise and discuss why Jack included Treasury Bills in the portfolio. (4 marks)

(c) Jack strongly believes that the stock market would fall in the next one year. Discuss one (1) possible way that he could use to reduce the impact on the portfolio if the stock market were to fall. (4 marks)