The table below shows the expected returns and betas for five investment funds.

Funds	Expected Returns (%)	Betas
Index Fund	10.0	1.00
Value Fund	14.0	1.50
Growth	12.5	1.25
Small-Cap	15.0	1.75
Large Cap	8.0	0.75

1. Create a SML with the average returns and betas of the Large Cap fund and the Small Cap fund shown in the table above.
2. Solve for the allocations needed to create a zero-market risk What is the rate of return for that portfolio?
3. Solve for the allocations needed to create a 2 security portfolio with a beta of 1.35. What is the expected rate of return for that portfolio?
4. Determine whether the Index, Value and Growth funds have return and beta combinations above or below the SML line. Explain the arbitrage strategy you would form with each of these funds. What conclusions do you draw about the SML from this analysis?
5. What is the equation for your SML?