Question 4 (25 marks)

A) Efficient Portfolio contains all shares and securities in the market. Explain how the decision is made in the aspect of risk and return for an efficient portfolio. [5 marks]

B) Assume the economy has a 45% chance of the market return will 10% next year and a 55% chance the market return will be 8% next year. Assume the risk-free rate is 4%. If Microsofts beta is 1.20, what is its expected return next year? [10 marks]