The following assets are available to trade. Suppose the CAPM holds true.

Asset Expected return Variance Beta

T-bill 0.02 0 0

Market portfolio 0.06 0.01 ?

XXX ? 0.09 1.5

ZZZ ? 0.04 2

(a) Mr. Kim invests 40% of his wealth in XXX and 60% in ZZZ. What is the covariance of his portfolio with the market portfolio?

(b) What is the optimal portfolio (i.e., compute weights for the optimal portfolio) for Mr. Kim, an investor looking to get an expected portfolio return of 10%