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 2%. a. What is the expected return and 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?)

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