Question: Please solve the below question step wise... CAPM (12 marks) Answer the following questions using the data in the following table. Stock Stock Risk free

Please solve the below question step wise...

CAPM (12 marks) Answer the following questions using the data in the following table. Stock Stock Risk free Market A B borrowing Index and lending Expected Return 8% ??? 4% 8% 16% 0% ??? Standard deviation 24% of return Beta 1.5 1.0 0.0 1.0 a) What are the CAPM implied return of stock A and B? (4 marks) b) It is known that Stock B sits on the Security Market Line (SML). What is the market's expected return on Stock B? Is Stock B fairly priced, underpriced or overpriced? (4 marks) 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? (4 marks)

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