Question 3 The market portfolio has yielded 10% on average over past years. It is expected to offer a risk premium in future years of 5%. The standard deviation of its return is 4%. The risk- free rate is 3%. a) What is the expected return from the market portfolio? [2 marks] b) Draw a diagram to show the location of the Capital Market Line. [2 marks] c) What is the expected return on a portfolio comprising 50% invested in the market portfolio and 50% invested in the risk-free asset? [2 marks] [Question 3 continues on the following page] Module Code: 5FNCE007W Page 3 of 9 d) What is the risk of portfolio in (c)? [2 marks] What is the market trade-off between portfolio risk and return suggested by these figures? [2 marks] [Total 10 marks]