(a) Derive the expected return (rP) and beta (βP) for a portfolio based on the following information:
Stock Percentage of Portfolio Beta (β) Expected Return
1 40% 1.00 12%
2 25% 0.75 11%
3 35% 1.30 15%
(b) Given the information in the table above, present the equation for the security market line and explain where the return for this specific portfolio would lie (plot) relative to the SML (i.e., below or above the line). Assume that the risk-free rate (rRF) is 8 percent and that the expected return on the market portfolio (rM) is 12 percent.
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