Problem set 3 Problem 1 (2pts] According to the CAPM, what is the expected return of the stock with the standard deviation of the returns of 40% and the correlation between its returns and the market returns is -0.1? The market's expected return and standard deviation are 6% and 15%, respectively. The risk-free rate is 3%. Problem 2 The risk-free rate is 1% and the market risk premium is 6%. Below table shows the return characteristics of three stocks A, B, and C: Stock Forecasted return (FR) B 3.80% 1.3 B 10.60% 1.1 6.40% 0.9 a. [3pts) According to the CAPM, what would be the fair return for each stock? b. [3pts) Characterize each stock as underpriced, overpriced, or properly priced