A hedge fund manager expects his portfolio to earn a rate of return of 9% year. The beta of the portfolio is 0.9.
a. If the rate of return on the market portfolio is 14 percent and the risk-free rate is 4 percent. What's the return of the portfolio according to CAPM?
b. Use a stock index fund (S&P 500 index) and money market fund (invested in T-bills) to create a portfolio with the same risk as the manager, but a higher return. What the percentage of your portfolio that you will invest in T-Bills?