Assume that the following data represent all risky securities in the economy.
Correlation Coefficient Matrix
Security Value Standard deviation A B C D
A £20 5.0% 1.0 0 0 0
B £20 10.0% 0 1.0 0 0
C £30 20.0% 0 0 1.0 0
D £30 30.0% 0 0 0 1.0
Total £100
i. What is the market portfolio ie what percentage of each security must be invested to achieve the market portfolio? What is the standard deviation of the market portfolio?
ii. If the risk-free rate of return is 4% and the expected return on the market portfolio is 7%, what are the Capital Market Line and Security Market Line equations?
iii. A pension fund that you are advising wishes to have an expected rate of return of 5%. How should the fund invest to obtain this? What would be the standard deviation and the beta of the pension fund’s portfolio?
 
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