Expected Return	Volatility
Value Stocks	10%		9%
Growth Stocks	17%		24%

Suppose you group all the stocks in the world into mutually exclusive portfolios(each stock is in only oneportfolio): growth stocks and value stocks. Suppose the two portfolios have equal size(in terms of totalvalue), a correlation of 0.5, and the followingcharacteristics: The riskfree-rate is4%. a. What is the expected return and volatility of the market portfolio(which is a5050combination of the twoportfolios)? b. Calculate the Sharpe ratios of the valuestock, growthstock, and market portfolio. c. Does the CAPM hold in thiseconomy? (Hint: Is the market portfolioefficient?)

a. What is the expected return and volatility of the market portfolio(which is a 5050combination of the twoportfolios)?The expected return of the market portfolio is_______%. (Round to one decimalplace.)The volatility of the market portfolio is ________%. (Round to one decimalplace.)

b. Calculate the Sharpe ratio of the value stock.The Sharpe ratio of the value stocks is _________. (Round to two decimalplaces.)The Sharpe ratio of the growth stocks is ________. (Round to two decimalplaces.)

c. Does the CAPM hold in thiseconomy? (Hint: Is the market portfolioefficient?) (Select the best choicebelow.) A. The CAPM does nothold, thatis, the market portfolio isefficient, because the market portfolio is not the portfolio with the highest Sharpe ratio.B. The CAPMholds, thatis, the market portfolio isefficient, because the growth portfolio is not the portfolio with the lowest Sharpe ratio.C. The CAPMholds, thatis, the market portfolio is notefficient, because the market portfolio is not the portfolio with the highest Sharpe ratio.D. The CAPM does nothold, thatis, the market portfolio is notefficient, because the market portfolio is not the portfolio with the highest Sharpe ratio.