Suppose that the three average returns per annum obtained in Part $($I$)$ are used as the estimates of the expected returns for the two stocks and the NZX$50$ stock market portfolio, respectively. Suppose that the risk$-$free rate is currently $4\%$ per annum.

a$,$ Draw a risk$-$return graph with beta of the x$-$axis and returns on the y$-$axis, which show the Security Market Line $($SML$),$ the market portfolio and the two stocks. $($show an exapmle of the graph drawn$)$

b$.$Determine the fair expected returns for the two stocks according to CAPM and discuss your findings.

Obtained data in part I,

Stwo stocks are $1.$ PK$.$NZ $-$ average return is $6\mathrm{.}25\%$

$2.$ VCT$.$NZ$-$ average return is $3\mathrm{.}46\%$

Portfolio$-$ average returns is $4\mathrm{.}86\%$

NZX$50$ Index $-$average return is $3\mathrm{.}50\%$