Junior equity analyst Penny attempted to draw the Securities Market Line (SML) to identify investment opportunities in the market. Along with risk-free Return (rf) and the market portfolio (M), Penny places four securities on the graph based on their risk and return characteristics. However, she left the chart incomplete, as shown below:

  

In the incomplete SML graph above, there are six securities A, B, C, D, E, and F. Identify which one of these is

i) The risk-free security (rf).

ii) The market portfolio (M)   (Justify your answers with reasons.)

iii)  If Penny wants to earn 3% alpha from his investment which one of the securities (among A, B, C, D, E and F) she should select? Justify your answer with calculations.

E(R) 14% 13% 12% 11% 10% 9% 8% %9 365 4% 7% 1% 0% B SML D $ E 2.5