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Suppose you group all the stocks in the world into two mutually exclusive portfolios (each stock is in only one portfolio). Suppose the two portfolios

Suppose you group all the stocks in the world into two mutually exclusive portfolios (each stock is in only one portfolio). Suppose the two portfolios have equal size (in terms of total value), a correlation of 0.5, and the following characteristics.

The risk-free rate is 2%. Does the CAPM hold in this economy? (Hint: Is the market portfolio efficient?)

Expected return Volatility
Portfolio 1 0.13 0.12
Portfolio 2 0.17 0.25

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