5. Which of the following statements is CORRECT?

a. The CAPM has been thoroughly tested, and the theory has been confirmed beyond any

reasonable doubt.

b. A graph of the SML as applied to individual stocks would show on beta the vertical axis and

required rates of return on the horizontal axis.

c. If two "normal" or "typical" stocks were combined to form a 2-stock portfolio, the

portfolio's expected return would be a weighted average of the stocks' expected returns, but

the portfolio's standard deviation would probably be greater than the average of the stocks'

standard deviations.

d. If investors become more risk averse, then (1) the slope of the SML would increase and (2)

the required rate of return on low-beta stocks would increase by less than the required

return on high-beta stocks.

e. An increase in expected inflation, combined with a constant real risk-free rate and a constant

market risk premium, would lead to decreases in the required returns on a riskless

asset and on an average stock, other things held constant.