Stock $x$ has systematic risk of betax $=1$ and the analyst forecasts its return to be $12\%.$ Stock $Y$ has betay $=1\mathrm{.}5$ and the analyst forecasts its return to be $13\%.$ The market

portfolio's expected return is $11\%,$ and $r_f=5\%.$

According to the CAPM, what are the required returns of the two stocks?

What is the alpha of each stock? Which stock is a better buy?

Draw the SML$.$ Mark each stock's CAPM required rate of return on the line and the forecast return. Mark their alphas on the graph.