Question: Portfolio Risk and Return. 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%.
How would you construct a portfolio from these two assets with an expected return of 8%? Specifically, what will be the weights in the S&P 500 versus T-bills?
How would you construct a portfolio from these two assets with a beta of .4?
Find the risk premiums of the portfolios in (a) and (b), and show that they are proportional to their betas.