Consider an economy where Capital Asset Pricing Model holds. In this economy, stocks A and B have the following characteristics: • Stock A has and expected return of 22% and a beta of 2. • Stock B has an expected return of 15% and a beta of 0.8. The standard deviation of the market portfolio’s return is 18%. (a) Assuming that stocks A and B are correctly priced according to the CAPM, compute the risk-free rate and the market risk premium.

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