a) Assume that the market (M), stocks A have the following characteristics: Stock Expected Return Standard Deviation A 4% 40.3% M 6.5% 15% The risk-free rate is 3%. The correlation for stock return with the market is Corr(RetA, RetM) = 0.35 First, calculate the betas for stock A. According to the CAPM, comment on whether stocks A is underpriced or overpriced, and whether it is above or below the Security Market Line (SML). b) Given a bond with a face value of 100, a coupon rate of 5%, annual coupon payments, a 4-year of maturity, and 6% yield-to-maturity. Using duration approximation, what is the change in price for a 0.4% increase in yield-to-maturity?

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Stock Expected Return Standard Deviation 40.3% A 4% M 6.5% 15% Stock Expected Return Standard Deviation 40.3% A 4% M 6.5% 15%