You are a new financial analyst for an actively managed mutual fund and need to analyse the following funds: Variance-Covariance Matrix Fund Expected Return (%) S&P 500 Lion Fund Capital Fund S&P 500 12% 0.0325 0.0420 0.0300 Lion Fund ? 0.0300 0.1225 0.0260 Capital Fund 0.0420 0.0260 ? Note that the Variance-Covariance matrix tells you the variance and covariance of S&P500, Lion Fund, and Capital Fund. The variances are the diagonal elements and the covariances are the off-diagonal elements. For instance, the variance of the Lion Fund is 0.1225 and the covariance of S&P500 and Capital Fund is 0.0420. You have also found the following probabilities for Capital Fund's returns in the next year: Probability Returns State (%) (%) Good 25% 45% Average 50% 18% Bad 25% -20% The actual average annual returns for the last 10 years for Lion Fund was 12% and the actual average annual returns of the S&P500 was also 12%. The risk- free rate over the period is 3%. All rates given are annual. a) Assuming that your probabilities are correct, what are the expected return and standard deviation for Capital Fund next year? [3 marks] b) Assuming that the S&P 500 is a good proxy for the market portfolio, what is the beta for Capital Fund? Using this beta, what is the expected return for Capital Fund according to CAPM? [2 marks]