Problem 1

CAPM: Calculating Beta when the observation weight is equal

	Weight	Return on Stock A (%)	Return on Stock B (%)	Return on Market (%)
2011	0.25	-10	-5	5
2012	0.25	5.5	1.05	2.5
2013	0.25	8	0.89	-0.95
2014	0.25	-2	-2.45	4.35
Expected Return
Variance

1. What are the betas of stock A, stock B, and market?

2. What are the expected returns of stock A, B, and market?

3. Based on CAPM, what are the true returns of stocks A and B if the T-bill rate is 1.0%

Stock	CAPM Return	Actual Return	Plot above or below SML Line	Over/Under/Correctly Valued
A
B