• In a certain capital market characterized by CAPM equilibrium, two risky stocks, P and Q are traded amongst a multitude of other financial assets. In this market, the risk-free rate of return is 6% and the market risk premium is 4%. The risk of the market portfolio (as σ) is 8%. The characteristics of P and Q are:

                        Stock                                              P                       Q

                                            Expected return                            8%                        12%

                                            σ of return                                     7%                         12%

• Compute the non-diversifiable risk (market risk) for P and Q.
• Suppose that in the market described above also a stock R is traded with a β of 1.25. This non-growth stock is expected to pay a yearly dividend of €7.70. What is the value of that stock according to the CAPM?
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