You are analyzing the returns of stock A and stock B and have collected the following information about stock As returns.

State of the economy	Probability	Stock A's return
Boom	0.3	20%
Normal	0.5	15%
Bust	0.2	1%

Additionally, your analysis shows the following information:

• The correlation between stock A and the market portfolio is equal to 0.3
• The standard deviation of the market portfolio is equal to 5%
• The expected return of stock B is equal to 10%
• The standard deviation of stock B is equal to 13.89%
• Stock B has twice as much systematic risk as the market portfolio
• The covariance between stock A and stock B is equal to 0.93

f) You would like to form a portfolio by investing in stock A, stock B, and a risk-free asset. Your objective is to allocate a 20% portfolio weight to the risk-free asset and at the same time to ensure that your portfolio has the same level of systematic risk as the market portfolio. What are the weights of stock A and stock B in this portfolio? g) Assume that the market risk premium is equal to 4%, and the risk free rate is equal to 2%. Do stock A and stock B plot on the Security Market Line (SML)? Are they correctly priced? Briefly explain.