1.The risk-free rate and the expected market rate of return are 0.06 and 0.12, respectively. According to the capital asset pricing model (CAPM), calculate the expected rate of return on security X with a beta of 1.2.

2.Your personal opinion is that security X has an expected rate of return of 0.11. It has a beta of 1.5. The risk-free rate is 0.05 and the market expected rate of return is 0.09. Demonstrate (and discuss), using the CAPM, whether this security is:

Underpriced;

Overpriced;

fairly priced, or;

cannot be determined from the data provided.

3.Discuss the 6 assumptions of the capital asset pricing model, and whether these assumptions will hold in "real world" investment decision process.

Assumption 1:

Assumption 2:

Assumption 3:

Assumption 4:

Assumption 5:

Assumption 6: