Question: Answer the following questions using the data in the following table. Stock A Stock B Risk free borrowing and lending Market Index Expected Return 6%

Answer the following questions using the data in the following table.

	Stock A	Stock B	Risk free borrowing and lending	Market Index
Expected Return	6%	???	3%	6%
Standard deviation of return	18%	12%	0%	???
Beta	1.5	1.0	0.0	1.0

a) What are the CAPM implied return of stock A and B?

b) It is known that Stock B sits on the Security Market Line (SML). What is the markets expected return on Stock B? Is Stock B fairly priced, underpriced or overpriced?

c) Can you determine the value of the standard deviation of the market index? If possible, what is the value? If not possible, what is your educated guess about the value?

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