Draw/plot the SML assuming that the risk free rate is 4% and the market earns 12% on average with a variance of 6. Plot asset C such that it has less risk than the market but plots above the SML... Plot asset D such that it has more risk than the market and plotsbeow the SML.. (be sure to indicate where the market portfolio is on your graph.)
(a) Is asset C correctly priced, under priced or overpriced?
(b) If asset C in incorrectly priced, how will it be returned to equilibrium (the SML)?
(c) Similarly, is the asset D correctly priced, underpriced or overpriced?
(d) If asset D is incorrectly priced, how will it be returned to equilibrium (the SML)? be sure to clearly label the graph ( both axes, and all relevant plotted points)