Stock	Expected Return
Starbucks	0.18
Sears	0.08
Arcade	0.16
Limited Brands	0.12

Considering the informtion provided below:

R_f = 0.06, E(R_m) = 0.16, _Rm = 0.2

a) Derive the equations of the Security Market Line (SML) and the Capital Market Line (CML), show them graphically and determine the equilibrium prices of the total risk and the systematic risk.

b) Discuss the effects of an increase in the risk aversion in the market in terms of both the CML and SML.

c) If you decide to invest $4,000 in Starbucks, $6,000 in Sears, $12,000 in Arcad, and $3,000 in Limited Brands, find the expected return and the risk of your portfolio as measured by beta.

d) Assuming that the prices of the above stocks are realized as follows:

Stock	P0	P1	Evaluation	Decision
Starbucks	40	45
Sears	22	25
Arcade	25	29
Limited Brands	40	45

Determine whether the above stocks are overvalued, undervalued or priced fairly, and indicate your decision.