1. Company XYZ has a CAPM beta of 1.5. The expected return on the market is 20% and the risk-free rate of return is 5%. According to CAPM, what should be the company XYZ’s expected return? (b) Company ABC has a CAPM beta of 1.2. The expected market premium is 14% and the risk-free rate of return is 3.8%. According to CAPM, what should be the company ABC’s expected return?
2. The standard deviation of the return on the stock market index (M) is 20% and the standard deviation of company A’s stock is 48%. The correlation ρA,M between the return on stock market index and return on company A’s stock is 0.32. Assume expected returns are determined by the CAPM. The return on the risk-free asset is 4% and the expected return on the market is 14%. (a) What is the CAPM beta of stock A? (b) What is the expected return of stock A?