1) Consider a market described by the table below. The risk-free rate, rf , is 4%.

Stock Price

Issued stocks 1000 0.35

1200 0.40 500 0.20

Cov(i, A) 0.1225

0.0980 0.0420

Cov(i, B) 0.0980

0.1600 0.0400

Cov(i, C) 0.0420

0.0400 0.0400

A B C

(a) (b) (c)

58

60 140

Create a portfolio with a CAPM of 0.6 and a positive weight in the risk-free asset.

Create a portfolio with a CAPM of 0.9 and zero weight in the risk-free asset.

The required return of stock B, E(rB), is 14.67% and the required return of stock C, E(RC), is 8.33%. What are the required returns of stock A, E(rA), and of the market, E(rM )?