Suppose you group all the stocks in the world into two 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:   Expected Return volatility Value stock 15% 14% Growth stock 16% 20% The risk-free rate is 3%. What is the expected return and volatility of the market portfolio (which is a 50–50 combination of the two portfolios)? Does the CAPM hold in this economy? (Hint: Is the market portfolio efficient?)

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