The market portfolio (M) provides a 15% annual return with a 20% standard deviation. The risk-free rate of return (r_f) is 5% per annum. Security P and Q provide 12% and 18% return per annum and their betas are 1.2 and 0.8 respectively. Based on this information Jenny drew the following graph of Security Market Line (SML) to identify any mispricing of security P and Q in the market. Unfortunately, Jenny forgot to label her graph. Help her label the following graph.

a) Identify the labels for Axis X and Axis Y.

b) Among the points, A, B, C, D, E and F on the graph - identify the locations of risk-free return and market portfolio (M).

c) Among the points A, B, C, D, E and F on the graph - Identify the points that are indicating the locations of security P and Q.

d) Based on the information above, do you think security P and Q are mispriced in the market? Explain if these securities are overpriced or underpriced?

Security Market Line (SML) Axis Y ? Security Market Line (SML) Axis Y