please type answer

Problem 4: (12 marks)

A security analyst has forecasted returns on the market portfolio and shares of RIM under three different economic conditions for next year:

State of the economy Probability

Boom

Moderate Growth Recession

Market 14 35% 12 11%

13% -14%

Return on

Return on RIM

55%

14 -6%

(a) Calculate the expected returns on the market portfolio. (2pts)

(b) Calculate the beta for RIM, assume the expected return for RIM is 16.75%. (6pts)

(c) Assuming the risk-free rate is 6%:

(i) Calculate the market risk premium (1pt)

(ii) According to the CAPM, what is the required return for RIM? Compare this to the expected return of RIM (expected return is 16.75%). What is the implication of your finding? (3pts)