Stock XYZ has an expected return of 12% and risk of = 1. Stock ABC has

Stock XYZ has an expected return of 12% and risk of β = 1. Stock ABC has expected return of 13% and β = 1.5.

The market’s expected return is 11%, and rf = 5%.

a. According to the CAPM, which stock is a better buy?

b. What is the alpha of each stock? Plot the SML and each stock’s risk–return point on one graph. Show the alphas graphically.