You and your best friend both work at the equity analysis division of Silverman Brothers. You are studying the investment values of stock A and stock B. You know that the expected annual risk-free rate is 4%, the market risk premium is 6%, and the standard deviation of the market return is 20%. You have developed a valuation model which provides the following predictions about stocks A and B.

		Stock A	Stock B
Expected correlation with market return		0.7	0.5
Expected mean return (based on SB model)		9%	7%
Expected standard deviation		20%	20%

a.Draw the Security Market Line. Clearly indicate the risk-free asset and the market portfolio and their coordinates in your diagram.

b.What are the betas of stock A and stock B? Draw stocks A and B in your diagram from a). Clearly indicate their coordinates.