South Wind Co. has been investing surplus funds in a small portfolio of common stocks over the past years. As fund manager of the portfolio, you are reviewing the portfolio which consists of five stocks. The details of the five stocks of the portfolio are as follows: Stock Number of shares Share price Beta Expected return A 200,000 $30 1.15 18.0% B 600,000 $15 10.80 13.0% 1,000,000 S4.5 1.40 18.5% D 200,000 $37.5 0.75 12.5% E 50,000 $60 1.75 24.0% The risk-free rate is 7%. Also, the expected return on the market portfolio is 15.5% Required: a. A member of the Board of Director asked you why certain levels of risk cannot be avoided even in a well-diversified portfolio. Explain. (6 marks) b. Calculate the weighted average portfolio beta and determine whether the portfolio is more or less risky than the market portfolio. (10 marks) c. What is the estimated equation for the Security Market Line (SML)? Discuss the effect to the SML graph when investors' risk aversion increases. (4 marks) d. Using the SML in part (c), discuss which stocks appear to be the "winners in the portfolio and which ones appear to be "losers". (10 marks) e. If investors' aversion to risk increased, would the risk premium on a high-beta stock increase by more or less than that on a low-beta stock? Explain