Question $3$

You have two shares $x$ and $Y$ with the following characteristics, assessed according to a number of probable economic states:

Question $3$a

You decide to construct a portfolio $P$ by holding $\frac{1}{3}$ of $x$ and $\frac{2}{3}$ of $Y.$ Solve for the

expected return for $x$ and $Y.$ Then compute the expected return for the portfolio.

$(12$ marks$)$

Question $3$b

A security has a beta of $1\mathrm{.}28.$ The risk$-$free rate is $3\mathrm{.}15\%$ and the market expected return

is $13\mathrm{.}5\%.$ Infer the return that you expect to be compensated given the systematic risk.

$(8$ marks$)$

Question $3$c

Discuss the risk components of the portfolio for an investor.