The risk free rate is 3% and you have two risky assets, A and B. The expected return of the risky assets A is 10%. The expected return of B is 13%. Asset B is 25% more risky than asset A (as measured by the common factor).
Note that the two assets are not correctly priced according to CAPM.
(a) What should be the risk free rate so that the two assets are correctly priced?
(b) What should the difference in risk between the two assets be so that the assets are correctly priced?
Please show your calculation process and explain the answer in details.