You are given the following two equations:

You also have the following information: E(RM ) = .15, Rf = .06, M = .15.

Answer the following questions, assuming that the capital asset pricing model is correct:

(a) Which equation would you use to determine the expected return on an individual security with a standard deviation of returns =.5 and a = 2? Given the parameters above, what is the expected return for that security?

(b) Which equation would you use to determine the expected return on a portfolio knowing that it is an efficient portfolio (consisting of the market portfolio M combined with the risk-free rate)? If you were told that the standard deviation of returns on that portfolio is equal to M and you were given the above parameters, what is the expected return on that portfolio?

(c) Can you determine the of the portfolio in (b)?

(d) Given your answers above, expand on what type of risky assets equation (1) can

be used for, and what type of risky assets equation (2) can be used for.

E(Ri)=Rf+(E(RM)Rf)iE(Rp)=Rf+(ME(RM)Rf)p