1. Use the basic equation for the capital asset pricing model (CAPM) to work each of the following problems.

a. Find the required return for an asset with a beta of .90 when the risk-free rate and market return are 8% and 12%, respectively.

b.Find the risk-free rate for a firm with a required return of 15% and a beta of 1.25 when the market return is 14%.

c.Find the market return for an asset with a required return of 16% and a beta of 1.10 when the risk-free rate is 9%.

d.Find the beta for an asset with a required return of 15% when the risk-free rate and market return are 10% and 12.5%, respectively.

2. Mike is searching for a stock to include in his current stock portfolio. He is interested in Hi-Tech Inc.; he has been impressed with the companys computer products and believes Hi-Tech is an innovative market player. However, Mike realizes that any time you consider a technology stock, risk is a major concern. The rule he follows is to include only securities with a coefficient of variation of returns below 0.90.

Mike has obtained the following price information for the period 2009 through 2012. Hi-Tech stock, being growth-oriented, did not pay any dividends during these 4 years.

Stock price

Year Beginning End

2009 $14.36 $21.55

2010 21.55 64.78

2011 64.78 72.38

2012 72.38 91.80

a. Calculate the rate of return for each year, 2009 through 2012, for Hi-Tech stock.

b. Assume that each years return is equally probable, and calculate the average return over this time period.

c. Calculate the standard deviation of returns over the past 4 years. (Hint: Treat these data as a sample.) d. Based on b and c determine the coefficient of variation of returns for the security.

e. Given the calculation in d what should be Mikes decision regarding the inclusion of Hi-Tech stock in his portfolio?