Your friend, Daisy, has presented the following information for two Hong Kong stocks to you:

Stock	Beta	Expected return
J	0. 4	6%
K	1.6	18%

The return of the Hang Seng Index (a good proxy of the market return) is currently 14% and the risk-free rate is 4%.

Answer the following questions:

a. She has asked you for help to construct an investment portfolio from the two stocks so that the portfolio beta (Bp) will be 1.3. Advise Daisy on the allocation of the two stocks in order to achieve her objective.

b. Explain in details whether you should invest in Daisys portfolio.

c. Draw the security market line (SML) and plot Daisys portfolio.

d. Comment on the following statements. If necessary, use mathematics to support your answers:

i. If the CAPM is valid, it is impossible to construct a portfolio of risky assets whose return is equal to the risk-free-rate, unless the portfolio only consists of risk-free assets.

ii. If the CAPM is valid, you will have a portfolios beta equal to 0.333 when you put $300,000 in the market portfolio an d$100,000 in risk-free assets.