Problem 1: According to the CAPM, what is the expected return on a security given a market risk premium of 12%, a stock beta of 1.44, and a risk free interest rate of 1%? Put the answers in decimal place.

Problem 2:

Consider the following two stocks, A and B. Stock A has an expected return of 10%, 10% standard deviation, and a beta of 1.20. Stock B has an expected return of 14%, 25% standard deviation, and a beta of 1.80. The expected market rate of return is 9% and the risk-free rate is 5%. Security __________ would be considered a good buy if we include the stock in a well diversified a portfolio because _________.

B, it offers better alpha

A, it offers better alpha

A, it offers better Sharpe ratio