Use the following information to answer a).

	AAA Ltd	BBB Ltd
Expected Return	8%	10%
Standard Deviation	16%	20%
Beta	0.85	1.21

Correlation coefficient between AAA Ltd and BBB Ltd is 0.45.

Required:

a) Assume that you have formed a two asset portfolio with 70% of your wealth invested in AAA Ltd and the rest in BBB Ltd.

i) Calculate the expected return of your portfolio. (2 marks)

ii) Calculate the standard deviation of your portfolio. (3 marks)

iii) Calculate the beta of your portfolio. (1 mark)

iv) Assuming the risk free rate of 0.87% and the market risk premium of 6%, calculate the required rate of return for your portfolio. Is your portfolio underpriced or overpriced and why? (2 marks)

v) Draw the Security Market Line using answers you obtained above. Label X-axis, Y-axis and intercept. Clearly present values on X- and Y-axis when you locate the expected and required returns of your portfolio in the graph. (4 marks)

b) Suppose that the standard deviation of the returns on the shares of two different companies is exactly the same. Does this mean that the required rate of return will be the same for these two shares? Justify your answer. (3 marks)