Suppose you are the manager of an investment fund in a two-parameter economy. Given the following forecast:
a) Would you recommend investment in a security with E(R; ) = .12 and COV(Rj , R„,) = .01? [Note: Assume that this price change has no significant effect on the position of the security market line.]
b) Suppose that in the next period security Ri has earned only 5% over the preceding period. How would you explain this ex post return?