1.Assume the risk-free rate is 1% (rf = 1%), the expected return on the market portfolio is 5% (E[rM] = 5%) and the standard deviation of the return on the market portfolio is 15% (M = 15%). (All numbers are annual.) Assume the CAPM holds.

a.For a moment (but just a moment) assume that the CAPM may not hold. A non-dividend paying stock has a current price of $50/share and an expected price in 1 year of

$53/share (based on your personal analysis of the company's prospects).

(i)If the stock has a beta of 1 ( = 1.0), what is its alpha ()?

(ii)What is the alpha () if the beta is 2 ( = 2.0)?