Question: Suppose that the risk free rate is 2% and the expected rate of return on the market is 8%. Suppose also that the volatility of

Suppose that the risk free rate is 2% and the expected rate of return on the market is 8%. Suppose also that the volatility of the market return is 18%. Consider Wal-Mart (WMT) stock. It has a beta of 0.50.

  1. According to the CAPM, what is the expected return of Wal-mart?
  2. Find the Sharpe ratio for the market.
  3. Your friend from UCLA says that since WMT has a beta less than 1, it has low exposure to market risk. This means that WMT should have a lower volatility than the market. Do you agree with this statement? Why or why not?

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