1. Assume the following two stocks. Assume also that the CAPM holds.

   Stock	Beta	Exp. R
   Y	1.6	18%
   Z	2	21%

   A. Determine the risk-free rate of return and the market rate of return and derive the security market line (SML) equation

B. Assume there is a stock K with beta of 1.2 and rate of return of 13.6%. Is K in equilibrium? If K is not in equilibrium, design an arbitrage strategy and calculate the arbitrage profit. Show the proper weight of each stock.