QUESTION " 6d" ONLY AND SHOW FULL WORK AND EXPLANATION! (30 points) Let the information on your portfolio be given as follows.

6. (30 points) Let the information on your portfolio be given as follows. You have three funds in the basket. The "beta's" among them that are estimated by using S&P 500 index are given as follows;  = 1.22, = 1.03 = 0.85. Answer the following questions;

a)   Why do we need these "beta's" to construct the portfolio?

b)   If the risk-free rate is given as 2%, what are the required returns for fund 1 and fund 2 if the market rate of return is expected to have 12%?

1

2

c)   Is it possible to construct a risk-free (or zero-beta) portfolio by combining asset 1 and asset 2? If yes, what is the required return for this portfolio? If the transaction cost for this portfolio requires 0.5% of commission, will you do it?

12

12

12

12

22

2

21