The following table contains three shares: A, B, and C.

Table 1

SHARES	Beta	STD (annual)	Forecast for June 2020
			Dividend	Stock Price
A	0.50	40%	$1.50	$50
B	2.00	45%	$0.85	$100
C	0.00	15%	$1.65	$35

The risk-free rate is 2.5%, and the market required return is 10%. The markets standard deviation is 15%. Assume that the next dividend will be paid after one year, at t=1.

1. What is the expected rate of return for each share according to CAPM? Then, calculate the portfolio return, assuming 30% of its value is invested in A, 50% in B, and 20% in C.

Relevant formulas

• E(R_i) = rf + x(E(R_M)-rf)
• E(Rp) = wxE(R_A)+ wxE(R_B)+ wxE(R_C)

2. If you are a risk-averse investor, and you want to construct your portfolio with shares A, B, and C, how would you decide on your portfolio weights to minimise your portfolios overall risk? Assume that you have an efficient portfolio, and you can effectively diversify away unsystematic (specific) risk, which is included in the standard deviation (STD).

Note: no calculation is required just suggest the weights of the shares in your portfolio considering shares A, B, and C. Explain your answer.

3. If you are a risk-taker investor, and you want to construct your portfolio with shares A, B, and C, how would you decide on your portfolio weights to maximise your portfolios total return? Assume the CAPM is correct and the expected future returns are those calculated in (a).

Note: no calculation is required just suggest the weights of the shares in your portfolio considering shares A, B, and C. Explain your answer.

4. In equilibrium, all the shares must have the same reward to risk ratio. The reward-to-risk ratio for all shares in the market is 7.50%. Reading the Financial Review, you spotted that the market return for shares A, B, and C are 6%, 10%, and 1% respectively. Use the reward-to-risk ratio to analyse if the shares in Table 1 are correctly priced. Explain your answer and what would happen in this market. (Your answer should be approx. 250 words)
5. From the investors point of view, a well-diversified portfolio makes sense. However, is this the case for the firm? For instance, would an investor be more attracted to a diversified firm than an undiversified one? (Your answer should be approx. 250 words)