Suppose that the CAPM is valid and that the market portfolio consists of60% stocks and 40% bonds. The standard deviation of the returns on stocks and bonds are 20% and 10%, respectively. The correlation between the returns on stocks and bonds is 0.25. The Sharpe ratio of the market portfolio is 0.4.

a) According to the CAPM, what is the market risk premium (i.e., the expected return on the market portfolio in excess of the risk-free rate)?

b) What is the expected excess return on stocks?