Problem 1) Assume that the CAPM is a good description of stock price returns. The market expected return is 7% with 10% volatility and the risk-free rate is 3%. New news arrives that does not change any of these numbers but it does change the expected return of the following stocks:
Expected Return Volatility Bets
Green Leaf 12% 20% 1.5
NatSam 10% 40% 1.8
HanBel 9% 30% 0.75
Rebecca Automobile 6% 35% 1.2
a) At current market prices, which stocks represent buying opportunities?
b) On which stocks should you put a sell order in?
Problem 2) Why does the CAPM imply that investors should trade very rarely?