Question: The Treasury bill rate is 2%, and the expected return on the market portfolio is 12%. Using the Capital Asset Pricing Model (hereafter, CAPM) by

The Treasury bill rate is 2%, and the expected return on the market portfolio is 12%. Using the Capital Asset Pricing Model (hereafter, CAPM) by William Sharpe (1964) with the given assumptions regarding the risk free rate and market rate to answer the following questions:

A. Draw a graph showing how the expected return varies with beta.

B. What is the risk premium on the market?

C. What is the required return on an investment with a beta of 2.0? Is the beta above or below the Market beta?

D. If an investment has a return (In this case similar to going Market Price) of 7.2% (and a Beta of .7), would this project be considered to have an acceptable NPV, when compared to the required (or expected) fair or intrinsic return calculated by using the CAPM formula? Why?

E. If the internal rate of return was calculated to be 10.0%, would we accept the project given the expected return calculated in part D, in other words, given the CAPM calculated in part D?

F. If the market expects a return of 13.5% from stock X, what is its beta (Here we solve for Beta, using all given components of CAPM, except beta which is not given)?

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