1. Draw the SML and label the X-axis and Y-axis. Label the points where the risk-free rate and market portfolio (M) are located on the graph. Plot a point for Security A showing that it has less risk than the market and is underpriced. Plot a point for Security B such that the beta of B is equal to 0.5.

1. Briefly explain what happens to Security A in question #1 when investors realize it is underpriced.

1. Draw a graph that represents an opportunity set for a multiple asset portfolio with N-risky assets and no risk-free asset (be sure to label everything). Indicate the following on the graph: (1) the minimum variance portfolio, (2) point (M) which represents the optimal portfolio, and (3) indicate the efficient frontier. Explain how the optimal portfolio is determined.

1. If you are a risk-averse investor, are your indifference curves flatter or steeper than a risk-taker?

1. Based on the CAPM, what risky portfolio will all investors choose? How is it possible to achieve a return higher than that portfolio?