Suppose you group all the stocks in the world into mutually exclusive portfolios (each stock is in only one portfolio): growth stocks and value stocks. Suppose the two portfolios have equal size? (in terms of total? value), a correlation of 0.5, and the following characteristics . The risk free-rate is 3%.
a. What is the (1) expected return and (2) volatility of the market portfolio? (which is a 50-50 combination of the two? portfolios)?
b. Calculate the Sharpe ratios of the value stock, growth stock, and market portfolio.
c. Does the CAPM hold in this economy?
(Hint?: Is the market portfolio efficient?)