1. Assume that the CAPM is a good description of stock price returns. The market expected return is 8% with 12% volatility and the risk-free rate is 3%. New news arrives that does not change any of these numbers, but it does change the expected returns of the following stocks: Stock Expected Return Volatility Beta Taggart Transcontinental 8% 28% 1.2 Rearden Metal 13% 40% 1.7 Wyatt Oil 7% 20% 0.8 Nielson Motors 10% 32% 1.3 Which of the following stocks represent buying opportunities? 1. Taggart Transcontinental

2. Rearden Metal

3. Wyatt Oil

4. Nielson Motors

a. 1 only

b. 2 & 3 only

c. 1 & 2 only

d. 2 & 4 only

2. Consider the following information regarding corporate bonds:

Rating	AAA	AA	A	BBB	BB	B	CCC
Average Default Rate	0.0%	0.0%	0.2%	0.4%	2.1%	5.2%	9.9%
Recession Default Rate	0.0%	1.0%	3.0%	3.0%	8.0%	16.0%	43.0%
Average Beta	0.05	0.05	0.05	1.0	0.17	0.26	0.31

Rearden Metal has a bond issue outstanding with ten years to maturity, a yield to maturity of 8.6%, and a B rating. The bondholders expected loss rate in the event of default is 50%. Assuming a normal economy the expected return on Rearden Metal's debt is closest to:

		1.6%
		4.6%
		0.6%
		6.0%