Suppose you group all the stocks in the world into two mutually exclusive portfolios (each stock Is In only one portfolio)- growth stocks and value stocks Suppose the two portfolios have equal size (in terms of total value), a correlation of 0.5, and the following characteristics:

The risk-free rate is 2%
a. What is the expected return and volatility of the market portfolio (which is a 50-50 combination of the tow portfolios)?
b. Does the CAPM hold in this economy? (Hint: is the market portolio efficient?)

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Value Stocks Growth Stocks Expected Return 13% 17% Volatility 12% 25%