Consider assets 1, 2, and 3 which follow the Capital Asset Pricing Model (CAPM) and with betas of 2, 3 and 4 respectively. A portfolio with weight ( 1/3 ; 1/3 ; 1/3 ) invested in the above three assets has a return of 2.5rM (where rM is the expected return of the,market portfolio). Furthermore, assume that the market return premium is 0.03 (i.e. rM – rf = 0.03). Consider a portfolio P with weights of (0.1; 0.4; 0.3) in assets 1,2 and 3 respectively and with a weight of 0.2 in the risk-free asset.,a. What is the beta of portfolio P?,b. Find rM and rf .,c. What is the expected return of portfolio P?,d. Suppose that another asset (asset 4) is listed as having an expected return of 0.25 and a beta of 9. Is it a good buy? Explain why or why not
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