Suppose there are only two risky stocks (A and B) and a risk-free bond in the market, in which CAPM holds. Stock A is issued by rm A, stock B by rm B. The total outstanding value of risk-free bond is zero (that is, zero net supply). For simplicity, assume that the net risk-free rate is zero, rf = 0%.. The market's mean return is m = 6%. Risky stocks' returns have same volatility denoted by (that is, A = B ). Assume all the values above do not change in all questions below. For questions a. and b. below, assume the correlation between two stock returns is = 0.5 (that is, AB = = 0.5).

Assume that the total outstanding equity value of stock A is SA = $50, of B is SB = $50. Find the exposures A and B (to the market risk) of stocks A, B respectively. Find the mean returns A and B of stocks A and B respectively.