Suppose you observe two companies X and Y with the following data
Company Beta Expected Return
X-----------1.5-------- 13.25%
Y----------- 2---------- 16.50%
Assume the CAPM holds for X and Y.
Plot the SML Calculate the risk-free rate and market expected return
Suppose you also observe a newly-listed company Z as follows:
Company Beta Expected Return
Z------------1.2--- 11.50%
Does the CAPM hold for Z? If not, explain what would happen to Z for the CAPM to hold if the market is efficient.