1. Explain the symbiosis between the BSM model and Risk -Neutral analysis. Why is this important beyond deriving the Black Scholes equation ?
2. Assume that the risk-free rate is 3% and the required return on the market is 8%. What is the required rate of return on a stock with a beta of 0.5? Round your answer to two decimal places.
3. Which one of the following stocks is correctly priced if the risk-free rate of return is 2.5 percent and the market risk premium is 7.80 percent? Stock Beta Expected Return A 0.75 8.79% B 1.47 14.00% C 1.40 13.42% D 1.06 10.67% E 0.96 9.84%.