The expected return on the market portfolio μm = E[Rm] = 15%, the standard devia- tion is σm = 25% and the risk-free rate is Rf = 5%. Suppose the CAPM holds.
(a) Draw on a diagram with the Capital Market Line (CML) derived from the above data. Make sure to clarify the intercept and the slope.
(b) Compute the expected return of two well-diversified portfolios (i.e., portfolios on the CML), one with standard deviation of 15%, and the other with standard deviation of 25%.
(c) Suppose that a portfolio with standard deviation of 10% has an expected return of 11%. Is this compatible with the CAPM? Explain.