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Assume the CAPM holds. Consider three feasible portfolios of stocks X, Y and Z with the following return characteristics: Portfolio X Y Z Expected return

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Assume the CAPM holds. Consider three feasible portfolios of stocks X, Y and Z with the following return characteristics: Portfolio X Y Z Expected return 7.5% 5% 10% Standard deviation 5% 10% 15% Show that any portfolio on the Capital Market Line (CML) with a positive weight in the market portfolio is perfectly correlated with the market portfolio. Interpret this result. (6 marks)

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