Problem: Suppose there is a risk free asset in the economy that gives a return of 0.02 (i.e. 2 percent), and that the returns of Security A, B and the market portfolio are given by the following table State of the world Market Portfolio Security A Security B Bear Market Normal Market Bull Market 0.10 0.08 0.25 0.20 0.10 0.20 0.30 0.05 0.30 Bear markets happen with a 20 percent chance, normal markets with a 50 percent chance and bull markets with a 30 percent chance A: Find each security's beta implied by the CAPM B: Draw the Security Market Line and plot each security. Does each security fall on the security market line? What can be inferred about each security's alpha