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Question 2 (total of 12 marks): An investor has a portfolio of two securities, stock XYZ and an exchange traded fund (ETF) that tracks the ASX200 and charges negligible fees. Assume that the ASX200 ETF is the market portfolio. The following table summarizes the investors' holdings. Note that they have zero treasury bonds. Assume that returns are effective annual rates (also called net discrete returns). Portfolio Details XYZ ASX200 ETF Investment $50,000 $150,000 Expected return 0.13 0.06 Total standard deviation 0.82 0.25 Beta 1.8 11 Correlation between XYZ and ASX200 0.65 Provide answers as decimals rounded to 6 decimal places. For example, if your answer is 0.23456789, write it as 0.234568. Question 2a (2 marks): What is the portfolio's total expected return pa? Answers: 0.0775 Question 2b (2 marks): What is the portfolio's total variance of returns pa? Answers: Question 2c (2 marks): What is the beta of the portfolio? Answers: 1.2 Question 2d (2 marks): What is the portfolio's systematic variance of returns pa? Answers: Question 2e (2 marks): if the government bond yield is 2% pa, what's the CAPM return of stock XYZ? Answers: Question 2f (2 marks): Comparing stock XYZ's expected return and its CAPM required return, is stock XYZ over, under or fairly priced

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