Suppose you group all the stocks in the world into mutually exclusive portfolios (each stock is in only one portfolio): growth stocks and value stocks. Suppose the two portfolios have equal size (in terms of total value), a correlation of 0.5, and the following characteristics (attached below). The risk free-rate is 3%.

a. What is the (1) expected return and (2) volatility of the market portfolio (which is a 5050 combination of the two portfolios)?

b. Calculate the Sharpe ratios of the value stock, growth stock, and market portfolio.

c. Does the CAPM hold in this economy?

(Hint: Is the market portfolio efficient?)