17. Beta and CAPM A portfolio that combines the risk-free asset and the market portfolio has an expected return of 8 percent and a standard deviation of 17 percent. The risk-free rate is 4.3 percent, and the expected return on the market portfolio is 11 percent. Assume the capital asset pricing model holds. What expected rate of return would a security earn if it had a .45 correlation with the market portfolio and a standard deviation of 60 percent? 18. SML Suppose you observe the following situation: State of Economy Probability of State Stock A Returns Stock B Returns Bust 0.15 -0.10 -0.08 Normal 0.60 0.09 0.08 Boom 0.25 0.32 0.26 a. Calculate the expected return on each stock. b. Assuming the capital asset pricing model holds and Stock As beta is greater than Stock Bs beta by 0.25, what is the expected market risk premium?