Assume that CAPM hypotheses are verified.
a) Represent the Security Market Line (SML) for a market with a risk premium of
5% and a return of 7% for the Treasury bills.
b) Suppose there is an asset with a Beta of 0.8 and an expected return of 9%.
Will the expected return for this asset be above or below the SML? Is the
asset correctly valued? If it isn’t explain what will happen in the market.