1) Your client is confused. He owns shares in the Whistler Snow-Making Company (WSMC) and wants you to explain your recommendation. Both of you agree on the following: WSMC has an expected return of 12 percent, a standard deviation of 9 percent, and a beta of 1.25; the expected return on the market is 8 percent, with standard deviation of 3 percent; and the risk-free rate is 4 percent.

Your client has a basic understanding of the CAPM and, based on the capital market line, feels he should sell the stock. However, you are recommending that he buy more of the stock (or at least hold what he has). Explain your recommendation to your client.

2) You are forecasting the returns for PVC Company, a plumbing supply company, which pays a current dividend of $10. The dividend is expected to grow at a rate of 3 percent. You have identified two public companies, ABC and VJK, which appear to be comparable to PVC. ABC has the same total risk as PVC and a beta of 1.2. VJK, in contrast, has a very different total risk but the same market risk as PVC. VJK's beta is 0.75. The market risk premium is 5 percent and the risk-free rate is 1 percent.

a.Determine the required return for PVC using the appropriate beta.

b.Determine the price of PVC.