Assume the CAPM holds. The risk-free rate is 4% and the market portfolio expected return is 10% and standard deviation of 10%. An asset has an expected return of 6% and a beta of 0.8.
a. Is this asset return consistent with the CAPM?
b. What expected return is consistent with the CAPM?
c. How could an abnormal profit be made if this asset is observed? Would such a situation be expected to exist in the longer term?