1) Your sister-in-law, a newly minted graduate just landed her first job with a large research firm. Her first assignment was to come up with an estimate of the change in share price for Bubbly Incorporated over the next twelve months. She estimates the price will rise from $50 to $70 per share over the next year and highly recommends you place a buy order.

You recall from your Corporate Finance course that the estimated return and risk are the only parameters that should be considered in the investment decision & have decided to us the CAPM to help you access the desirability of purchasing shares in this firm.

Assuming an expected return on the market over the next 12 months of 10%, a risk free rate of 5%, a beta for Bubbly of 1.00 please answer the following questions:

Briefly define the CAPM and explain its use in the investment analysis process

Based on the CAPM what is the required return on an investment in Bubbly over the next 12 months? Would you make the purchase (why or why not)?

What would you expect to happen to the stock price of Bubbly in the short term? Why?