Question 8: Consider a "world" with three risky assets (and one risk-free). Suppose a time-series regression of asset returns on the market portfolio has yielded the following results: Asset 1: Asset 2: Asset 3: 10-R, = 0.09+1.5x('me R;)+E, 12. -R, =0.05+0.4x("me -R, )+Ezt 13,4 R, =0.10+1.2x("M: -R)+3,4 You have estimated the expected returns on the assets as ui = 0.20, H2 = 0.14, and uz = 0.16, respectively. a) Explain, in as much detail as you can, how to estimate the Securities Markets Line (SML) from this information. Provide the necessary calculations. Draw a sketch of the SML, indicating within this the locations of the three assets and the market portfolio. b) What inference (if any) would you draw from this estimation about the validity of the CAPM? Carefully explain your argument(s). c) What inference (if any) would you draw regarding the performance of portfolios formed from the three assets? Carefully explain your argument(s). Suppose there are 4 investors, each with $1,000 to invest: The first invests all their wealth in the risk-free asset. The second invests all their wealth in the market portfolio. The third splits their wealth equally between the risk-free asset and the market portfolio. The fourth borrows an additional $1,000 at the risk-free rate, and invests all available funds in the market portfolio. d) For each of these investors, what are the betas and expected returns on their portfolios (expressed as functions of Rf and El rm))