Question 3 a. Assume investors have homogeneous beliefs and use the mean-variance framework to obtain their optimal portfolio allocations. Making the necessary assumptions, explain how the CAPM equation obtains from the existence of the market portfolio, carefully explaining each step. (10 marks) TURN OVER Page 3 of 6 b. Suppose a market has only the following two risky assets: Stocks # of shares Price per share Expected return (%) Std. Deviation (%) A 10 20 6 20 B 20 10 8 30 The correlation between stocks A and B is -0.2. 1. Compute the composition of the market portfolio detailing and carefully explaining your calculations. Compute the expected return and standard deviation of the market portfolio and comment on the results. (8 marks)