Question 3 - Risk and return (10 marks)

A) NCSB Inc. has a beta of 0.89. If the expected market return is 12.5% and the risk-free rate is 4.5%, what is the appropriate required return of CSB (using the CAPM)? (4 marks)

B) John is considering investing in a share and is aware that the return on that investment is particularly sensitive to how the economy is performing. Her analysis suggests that four states of the economy can affect the return on the investment. Using the table of returns and probabilities below, calculate the expected return and the standard deviation of the return on Cindys investment. (6 marks)

Situation	Probability	Return
Boom	0.3	20%
Good	0.4	10%
Level	0.2	10%
Slump	0.1	-5%