Answer:
See explanations for step by step aoproach to answer and see attachment for graph
Step-by-step explanation:
Plot E(R) = Rf + Beta*(Rm-Rf) as function of beta.
at 1.4
E(R) = 5% + 1.4*(12-5) = 14.8%
E(R) = WfRf + Wa*E(Ra)
= 0.4*5% + 0.6*14.8%
= 10.88%
3. Since, the beta of risk free asset is zero
Bp = wf*Bf + wa*Ba
0.6 = 1.4*wa
wa = 42.8%
wf = 57.2%
d. 14% = 5% + B*(12%-5%)
B = 9/7 = 1.28
e. 2 = wfBf + waBa
wa = 2/1.4
= 142%
It means the portfolio is created by leveraging. Take 42% of value on risk free rate as loan and invest in risky asset.