Finance Questions

| January 31, 2015

Problem 1 (16 points) _____ Consider the following information: Stock A Stock B T-bills Beta 0.6 1.2 0.0 Expected return, % 5.0 8.0 2.0 Assuming that all stocks are priced correctly according to the CAPM, compute the expected return on the market portfolio. (4 points) Stocks are generally regarded as being risky investments. According to the CAPM, is it possible for a stock to have an expected return that is less than the risk-free rate? Explain.

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