Question

Comment on whether the following situations are possible in a world in which the CAPM is the true asset pricing model. Your answer should include an explanation as to why or why not the scenario is valid under the CAPM. Treat each part as a separate question.

Part A:Stock A has an expected return of 15% and a market beta of 1.0, stock B has an expected return of 16% and a market beta of 0.9.

Part B:Stock A has an expected return of 20% and a standard deviation of 35%, stock B has an expected return of 25% and a standard deviation of 25%.

Part C: The risk-free rate is 5%. The market has an expected return of 20% and a standard deviation of 27%. Stock A has an expected return of 16% and a standard deviation of 19%.