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Stock XYZ has an expected return of 12% and a beta of 1.0. Stock ABC is expected to return 13% with a beta of 1.5.

Stock XYZ has an expected return of 12% and a beta of 1.0. Stock ABC is expected to return 13% with a beta of 1.5. The markets expected return is 11% and risk free rate is 5%. According to the CAPM, which stock is a better buy? What is the alpha of each stock? Plot the SML and the two stocks and show the alphas of each on the graph.

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