Suppose that the TSX, with a beta of 1.0, ha s an expected return of 13% and

Question:

Suppose that the TSX, with a beta of 1.0, ha s an expected return of 13% and Treasury bills provide a risk-free return of 5%.

a. What would be the expected return and beta of portfolios constructed from these two assets with weights in the TSX of (i) 0; (ii) .25; (iii) .5; (iv) .75; (v) 1.0?

b. Based on your answer to (a), what is the tradeoff between risk and return, that is, how does expected return vary with beta?

c. What does your answer to (b) have to do with the security market line relationship?

Expected Return
The expected return is the profit or loss an investor anticipates on an investment that has known or anticipated rates of return (RoR). It is calculated by multiplying potential outcomes by the chances of them occurring and then totaling these...