Suppose that the S&P 500, with a beta of 1.0 has an expected return of 10% and T-bills provide a risk-free return of 4%.
a. How would you construct a portfoilo from these two assets with an expected return of 8%? Specificaly, what will be the weights in the S&P 500 verses T-bill?
b. How would you construct a portfolio from these two assets with a beta of .4?
c. Find the risk premium of the portfolio in (a) and (b) and show that they are proportional to their betas.