Question: 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

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:

Return on Return on

State of the economy Probability Market RIM

Boom 35% 55%

Moderate Growth 11% 13%

Recession -6% -14%

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

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

  1. Assuming the risk-free rate is 6%:
    1. Calculate the market risk premium (1pt)
    2. 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)

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