There is a portfolio with five shares, each share has a beta of 0.75 on the market index, and an annual volatility of 39%. The idiosyncratic components of the returns of the shares are uncorrelated. The annual volatility of the market index is 20%. The risk free rate is 5% per annum. The market risk premium is 8%.

1. What is the annual volatility of your portfolio and its equilibrium expected rate of return?

2. Yesterday, your portfolio went down by 3%. Was that a large fall for a single day?

3. Over the next year the market goes up to 35%, and your portfolio goes up to 40%. Does that suggest your were lucky or skillful?