Given the following information, Rf = .06, E(RM) = .12, σM = .15,where E(RM) is expected market return and σM is volatility of market return, answer the following questions.
(a) What is the equilibrium expected return on a risky asset with a β of 1.2? With a β of .6?
(b) What is the β of a security with equilibrium expected return of .03?
(c) Is it possible in equilibrium for the expected return on a risky security to be less than the risk-free rate? Explain. (Hint: look at part (b))