Consider the table below, which gives historical returns on stock A and the market:

Year

2017

MarketReturn: .10

Stock A return: .16

2018

MarketReturn: .15

Stock A return: .22

2019

MarketReturn: .17

Stock A return: .28

Assume that the returns above can be used to estimate distribution of future returns and the annual risk-free rate is 1.7%.

Answernext4 questions

(2 MARKS) What are the expected rates of return on stock A and the market?

a. E(rA)=23%, E(rM)=14%

b. E(rA)=22%, E(rM)=13%

c. E(rA)=20%, E(rM)=11%

d. E(rA)=21%, E(rM)=14%

e. E(rA)=22%, E(rM)=14%

What is the variance ofstock market returns?

a. 8.67 (%)2

b. 13 (%)2

c. 0.13

d. 0.0867

e. 26 (%)2

What is the beta of stock A?

a. 0.619

b. 0.887

c. 1.615

d. -1.615

e. None of the above

What is the best trading strategy for stock A if investors believe that CAPM should hold most of the time?

a. An investor should buy stock A

b. An investor should short stock A

c. An investor should ignore stock A

d. The best strategy cannot be found

e. An investor should find an arbitrage strategy with stock A