Question: Given that the expected return on the market portfolio is 10%, the riskfree rate of return is 6%, the beta of stock A is 0.85,

Given that the expected return on the market portfolio is 10%, the riskfree rate of return is 6%, the beta of stock A is 0.85, and the beta of stock B is 1.20:

a. Draw the SML

b. What is the equation for the SML? [6%+(4%)β]

c. What are the equilibrium expected returns for stocks A and B? [9.4%], [10.8%]

d. Plot the two risky securities on the SML.

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