(CML) In a stock market where only two stocks are traded:

a. The market portfolio is composed of 37.5% stock A and 62.5%
stock Z. Find the equation of the capital market line (CML).

b. Will the market portfolio change if the risk-free return changes to 3%? If yes, explain why and calculate the new market portfolio.

c. Answer this question again assuming the risk-free return is 0%.

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1 A B RETURN STATISTICS OF STOCKS A AND Z 2 3 Average return 4 Variance 5 Covariance of returns 6 7 Risk-free return A 31.00% 0.30 -0.05 5.00% C Z 15.00% 0.08