7. Capital Asset Pricing Model (CAPM). [25 Marks] 1) Measuring Risk. a. Is it possible that a risky asset could have a beta of zero? Based on the CAPM, what it the expected return on such an asset? Explain your answers. [6 Marks] b. Your company is following two stocks, ABC plc and XYZ plc, and your manager tells you the following: 'The shares of ABC plc have traded close to $15 for most of the past four years, and because of this lack of price movement the stock has very low beta. XYZ plc, on the other hand, has traded as high as $90 and as low as its current $20. Since this stock has demonstrated a large amount of price movement, the stock has a very high beta.' Do you agree with your manager's analysis? [7 Marks] 2) CAPM and Expected Return. A share of stock with a beta of 1.2 now sells for $100. Investors expect the stock to pay a year-end dividend of $5. The T-bill rate is 3%, and the market risk premium is 5%. a. Suppose investors believe the stock will sell for $120 at year-end. Is the stock a good or bad buy? What will investors do? Provide full details of your calculations and explain your answer. [6 Marks] b. At what price will the stock reach an "equilibrium" at which it is perceived as fairly priced today? Provide full details of your calculations and explain your answer. [6 Marks]