Suppose that there are only two stocks, X and Y, listed in a market. There are 200 outstanding shares of stock X and 600 outstanding shares of stock Y. Current prices per share are pX = 40$ and pY = 20$.

(i) What is the market portfolio in this market? Suppose that the expected returns on stocks X and Y are X = 10% and Y = 20%.

Standard deviation of returns are X = 15% and Y = 30%. Covariance between the returns is zero, that is XY = 0.

(ii) What are the expected return and the standard deviation of return on the market portfolio

(iii) Calculate market betas, X and Y , for stocks X and Y . Suppose that the risk-free rate of return is r0 = 8%. (iv) Verify that the Security Market Line holds for both stocks.