1.A security has a beta of 0.8; the riskless rate is 4%, and the expected market risk premium is 6% per year.The dividend for this security next year is anticipated to be $2.00 per share; the dividend is expected to grow at 3% in perpetuity.The stock is currently trading at $38 a share.

a.If the CAPM is true, is the security in equilibrium?

1.You happen to believe that the market downturn is overdone, and that the economy will rebound strongly.If the CAPM holds, what does this imply about your portfolio allocation?

2.In contrast to your belief above, your spouse believes that the market will continue to decline (the dreaded "W" shaped recession).If the CAPM holds, what does this imply about your (joint) portfolio allocation?