QUESTION 3 PLEASE!

Stock	Beta	E(rj)
A	0.2	0.036
B	0.3	0.044
C	0.8	0.084
D	1.3	0.124
E	1.5	?
F	2.1	?
G	2.5	?

3. Find the expected return for Stock E, F, and G.

8.7.3

Beta Elri) 0.036 Stock A B 1 O 0.2 0.3 0.8 1.3 1.5 2.1 2.5 0.044 0.084 0.124 9 2 F F 2. Find the expected return for the market portfolio. 3. Find the expected return for Stock E, F, and G. 4. Asset H has beta of 2.6 and an expected return of 22.5%. Is it correctly priced based on CAPM? Yes or no. Explain. Answer the following questions with hints provided. 1. Find the expected return for the risk free asset. Hint: Do this in two steps. a) Use the difference of any pair of assets to infer the market risk premium [E(Rm - Rf)]. b) Use CAPM and the market risk premium derived in a) to back out the Rf Stock B Stock A Er=Rf+(Beta Market Risk Premium) .036=Rf+.2*Market Risk Premium) .044=Rf+(-3*Market Risk Premium) .008= 1*MRP MRP= .008/1 =.08 = 8% .036=Rf+.20.08) Rf=(.036-016) = .02 or 2%