1) What is the expected return for the overall stock market (r_M) if risk-free rate is 4% and the market risk premium is 5%? What is the required rate of return on a stock with a beta of 1.6?

2) John is the manager of a $10 million investment fund. The fund consists of five stocks with the following investments and betas:

Stock Investment (in million $) Beta

A $2.5 -0.40

B $3.0 1.45

C $2,0 0.85

D $1.5 2.00

E $1,0 0

If the risk-free rate is 3.5% and the markets required rate of return is 10.5%, what is the investment funds required rate of return? (Hint: find the portfolio beta first and then apply the CAPM formula)

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