1. In the world of CAPM, explain whether these conditions hold or not. E(R) = expected return, E(RM) = expected return for market a. E(RA)=20%, E(RB)=18%, standard deviation of A = 15%, and for B=20% b. E(RA)=25%, E(RB)=20%, RF=10%, E(RM)=20%, beta for A=1, beta for B=1,5 c. Return for the small-cap stock is higher than the return for big-cap stocks 2. CAPM is an equilibrium model. In equilibrium condition, all assets have to lie in SML (Security Market Line). E(R) SML *A *B RF Beta a. Explain whether A, B and C are in equilibrium condition according to CAPM. Which one is under, over, or fair value? b. What is going to happen with A, B, and C