QUESTION 3

Consider a mean-variance portfolio framework. The market portfolio, M, has an expected return of 8% and standard deviation of 20%. The risk-free rate is 3%.

(1) An investor has a mean-variance utility function Calculate the standard deviation of the optimal complete portfolio for this investor.

(2) Consider an individual security i. Its return has a correlation of 0.5 with the market portfolio. =24%. Calculate the beta of security i.

(3) The forecasted return of security i by the investor is 6%. Is this security under-, fairly-, or over-priced according to CAPM? Explain your argument.