Suppose the Capital Asset Pricing Model (CAPM) is valid in a simple market. Use CAPM to explain and answer following questions. Note: There is no relationship between each situation. (a) Can these portfolios exist in the market? (Hint: Security market line) If yes, com- pute risk premium on portfolio A. Portfolio Expected return Beta Risk-free 1% 0 Market 12% 1 A 15% 1.5 (b) Can these portfolios exist in the market? (Hint: Capital market line) If yes, com- pute risk premium on portfolio B. Portfolio Expected return Standard deviation Risk-free 5% 0 Market 10% 11% B 8% 10% (c) Suppose now, the APT is valid in the market with two factors, F, and F2. The risk-free rate is 6%. The following information is available about two well-diversified portfolios C and D: Securities Expected return B on F 6 on F2 C 15% 1.2 1.8 D 18% 1.8 1.2 Assume no arbitrage in the market. Compute the risk premium on Fi and F2, respectively