. You have decided to invest $1,000 in either Continental Airways or Wal-Mart. You know that Continental Airways has a beta of 2.1 and Wal-Mart has a beta of 0.45. You have done your own research and you expect the return on Continental to be 18% and on Wal-Mart 8%. The risk-free rate is 3% and the market risk premium is 8%.

a. Does Continental lie on, above or below the Security Market Line (SML)?

b. Does Wal-Mart lie on, above or below the Security Market Line (SML)?

c. According to the CAPM, which stock should you invest in?