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Question - There are two portfolios, portfolio A and portfolio B, and they are both on the Capital Market Line (CML). Expected return of portfolio A is 5% and expected return of portfolio B is 6%. The risk-free rate is 1%. Variance of returns for portfolio A is 16% and variance of returns for portfolio B is 25%.
(a) If there is enough information, please compute covariance between portfolio A returns and portfolio B returns. Otherwise, please write down which information is additionally needed to compute the covariace. You can show the steps numerically, verbally, or combination.
(b) Consider portfolio C and portfolio D that are both on the CAPM's security market line (SML). Does this imply that portfolio C and D should lie on the CML? Please explain why you agree or disagree?
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