Suppose that the S&P/ TSX Composite Index, with a beta of 1.0, ha s an expected return of 10% and Treasury bills provide a risk -free return of 4%.
a. Construct a portfolio from these two assets with an expected return of 8%. What is the beta of this portfolio?
b. Construct a portfolio from these two assets with a beta of .4. Calculate the portfolio’s expected return.
c. Show t ha t the risk premiums of the portfolios in (a) and (b) are proportional to their betas.